What are the Different Types of LLC? (All You Need to Know)
Knowing which one is right for you can be challenging with so many LLC types available.
As LLC experts with years of experience, we have helped many businesses choose the right type of LLC for their needs.
In this article, we will explore the different LLC types and their unique characteristics and help you determine the best fit for your business.
Furthermore, it's important to recognize the significant role small businesses play in the U.S. economy. According to the U.S. Small Business Administration, out of the 33.3 million small businesses in the United States, they represent 99.9 percent of all US business entities.
This statistic underscores the vital importance of choosing the correct LLC type, as the right choice can have a profound impact on the sustainability and growth of your business within the American economic landscape.
Quick Summary
- There are various LLC types, including domestic and foreign LLCs, professional LLCs (PLLCs), series LLCs, restricted LLCs, and anonymous LLcs.
- Understand each type of entity's benefits, such as limited liability protection or tax advantages.
- According to the U.S. Small Business Administration, out of the 33.3 million small businesses in the United States, they represent 99.9 percent of all US business entities.
- I always advise my clients to assess business goals to determine which type best suits their needs while considering applicable state regulations.
What Are The Different Types Of LLCs?
The different types of LLCs include domestic and foreign LLCs, professional LLCs (PLLCs), and series LLCs.
Various LLCs exist, each catering to specific business needs and requirements. Let us discuss each type in detail.
"Choosing the right LLC structure is crucial for your business."
- Jon Morgan, CEO, Co-Founder & Editor-in-Chief of Venture Smarter
Domestic and Foreign LLCs
A domestic LLC is a business entity formed in its home state, providing limited liability protection and pass-through taxation benefits [1].
On the other hand, a foreign LLC is registered to conduct business in other states, which can offer advantageous business laws, cost savings on registration, and reduced tax rates in certain jurisdictions.
An S Corporation is a tax status that an LLC can elect to reduce self-employment taxes.
By differentiating income into salary and distributions, only the former is liable for self-employment taxes, providing a tax benefit for LLC owners [2].
Professional LLC (PLLC)
Certain licensed professionals, such as lawyers, accountants, and medical providers, must form a Professional LLC (PLLC) rather than a regular LLC.
In 29 states, PLLCs offer similar benefits to regular LLCs, including limited liability protection.
However, a major difference between PLLCs and regular LLCs is that PLLCs are mandatory for certified professionals, while regular LLCs are suitable for any business.
Furthermore, PLLCs have unique filing requirements specific to their respective professions.
Series LLC
A Series LLC is a unique type comprising a parent LLC and smaller LLCs with distinct members, managers, and assets [3].
This allows business owners with multiple interests to benefit from increased flexibility.
Drawing from my firsthand experience with Series LLCs, I've seen how this structure empowers business owners to efficiently manage diverse assets or business ventures under one umbrella.
If properly managed, each series can operate as an entity with a distinct company name, bank account, and LLC operating agreement.
Furthermore, each series can have distinct members and possess separate assets.
However, only a limited number of states and jurisdictions recognize the Series LLC business structure.
Diving Deeper into LLC Variations
As we dive deeper into LLCs, we'll explore various LLC variations, including restricted, anonymous, low-profit, general, and family-limited partnerships. Each variation caters to specific business needs, providing unique benefits and challenges.
Restricted LLC
Restricted LLCs, primarily found in Nevada, offer tax benefits for transferring assets to family members but are not intended for traditional business dealings. These LLCs are designed to provide estate planning benefits and control over future asset distributions.
Anonymous LLC
An anonymous LLC is a type of limited liability company that does not require the disclosure of its members' names, providing privacy and reduced liability [4].
This type of LLC is frequently utilized to preserve privacy.
Despite the anonymity, the tax rate remained consistent with that of other LLCs, a relief that underscored the viability of anonymous LLCs for my clients seeking privacy without financial penalty.
Low-Profit LLC (L3C)
A low-profit LLC (L3C) is a hybrid of for-profit and non-profit LLCs, focusing on achieving a social benefit while still generating a profit for its members.
These LLCs are designed to provide a minimal return on investment while focusing on philanthropic or educational objectives.
L3Cs are a unique combination of for-profit and non-profit LLCs created to generate revenue for members while having a social impact, unlike other LLCs, which are focused solely on generating profits.
L3Cs are formally acknowledged in several states, including Alabama, Kentucky, Minnesota, North Dakota, and Tennessee.
General Partnership
General partnerships are similar to multi-member LLCs but without limited liability protection. These partnerships involve two or more individuals who agree to share responsibilities, assets, and profits.
The primary difference between general partnerships and multi-member LLCs is the absence of limited liability protection in the former.
From my experience, each partner in a general partnership is personally liable for the business's debts, which can be a significant drawback for those considering this business structure.
Family Limited Partnerships
Family limited partnerships are designed for family-owned businesses, providing tax benefits and asset protection.
My clients opt for this type of LLC to ensure the longevity and financial health of their family-owned enterprise. This structure allowed them to leverage tax benefits and asset protection mechanisms, crucial for preserving the business for future generations.
Single-Member vs. Multi-Member LLCs
There are also different variations of LLCs regarding their size and number of owners.
Single-Member LLC
A single-member LLC is a limited liability company with only one owner, making it suitable for solo entrepreneurs [5].
This LLC structure offers limited liability protection and tax benefits, such as LLC pass-through taxation, allowing owners to declare business income and losses on their tax returns.
Multi-Member LLC
A multi-member LLC comprises two or more partners, each with a respective share percentage in the company based on their investment.
This structure allows for shared decision-making and division of profits and losses among the members.
Multi-member LLCs offer limited liability protection, tax advantages, and enhanced credibility for their members, helping protect personal and business assets.
A market analysis by the National Federation of Independent Business (NFIB) shows that Multi-Member LLCs account for around 25% of all LLC formations, indicating a significant portion of businesses prefer collaborative or partnership structures.
However, it's important to note that the structure and management style of a multi-member LLC can be more complex than that of a single-member LLC.
Member-Managed vs. Manager-Managed LLCs
Member-managed LLCs are owned and operated by the members of the LLC. Understanding the differences between these two management styles can help you determine which is best suited for your business needs.
Member-Managed LLC
In a member-managed LLC, all members are involved in the business's decision-making process and day-to-day operations.
This provides equal control among the members and allows them to make decisions jointly and divide profits and losses equally.
Members of a member-managed LLC are accountable for making decisions concerning the company, overseeing daily operations, and ensuring that the LLC adheres to all relevant laws and regulations.
This management structure can provide increased flexibility and autonomy for its members.
Read more about the differences between member-managed and manager-managed LLC.
Manager-Managed LLC
In a manager-managed LLC, one or more managers are appointed to handle daily operations, offering privacy protection and a more structured management approach. The managers can be either members of the LLC or outside individuals/entities.
Managers in a manager-managed LLC are responsible for making decisions and overseeing the company's daily operations, such as hiring and dismissing personnel, establishing budgets, and managing the financials.
This management structure can provide a more organized approach to running the business. Still, managing and removing a manager may be challenging if they are not fulfilling their obligations appropriately.
How To Choose the Right Type of LLC for You?
To choose the right type of LLC for you, you need to consider your business goals and state regulations.
Assessing Business Goals
Assessing your business goals and objectives is essential to determine the most suitable LLC structure for your business.
Factors to consider include:
- The type of business you are operating.
- The size of your business.
- The amount of capital you have at your disposal.
Additionally, it is important to be mindful of the legal and tax implications of each type of LLC.
Considering State Regulations
When selecting the type of LLC for your business, it's important to consider state-specific regulations and requirements.
Each state has its own rules and regulations governing the formation and operation of LLCs, so it's essential to be aware of the requirements in your particular state.
Understanding these state-specific variations is crucial for selecting the most advantageous jurisdiction for your LLC. Here are some examples.
Delaware
Known for its business-friendly laws, Delaware offers a Court of Chancery that specializes in business law, providing quick and expert resolutions to corporate disputes. Additionally, Delaware's privacy provisions do not require LLC members to be listed on public records, an attractive feature for those seeking anonymity.
The state also does not impose state income tax on LLCs that do not operate within its borders, making it an appealing choice for businesses operating nationally or internationally.
Nevada
Nevada is another state that stands out for its LLC-friendly legislation. Similar to Delaware, Nevada offers privacy benefits by not requiring the disclosure of members' identities on public filings.
Moreover, Nevada boasts no state income tax, corporate tax, or franchise tax for LLCs. Its legal system is also known for strong protections against personal liability for LLC members, further enhancing its attractiveness to business owners prioritizing asset protection.
Texas
Texas law provides for a Series LLC—a unique structure that allows for the creation of separate "series" or cells within a single LLC, each with its own liability, assets, and members.
This structure is ideal for businesses that own multiple properties or operate distinct projects, offering a way to compartmentalize risk without the need to form separate legal entities.
New York
New York, while not as tax-advantageous as Delaware or Nevada, offers its own set of benefits for certain types of LLCs, particularly professional service providers.
New York allows the formation of Professional Service Limited Liability Companies (PLLCs) specifically for licensed professionals such as doctors, lawyers, and accountants. This designation helps professionals take advantage of LLC protections while complying with state mandates that professional services be rendered through a licensed entity.
FAQs
How Do You Categorize An LLC?
You can categorize an LLC based on its management structure, number of members, and specific purposes. Factors such as the number of owners, the nature of the business, and the state where the LLC is registered can help determine the appropriate category for an LLC.
What Are The Four Characteristics Of An LLC?
The four characteristics of an LLC include limited liability protection, pass-through taxation, flexibility in management, and fewer formalities compared to corporations. These unique attributes make LLCs an attractive business structure for many entrepreneurs, offering numerous advantages over other business entities.
References:
- https://dlcp.dc.gov/service/domestic-limited-liability-company
- https://www.irs.gov/businesses/small-businesses-self-employed/s-corporations
- https://www.ftb.ca.gov/file/business/types/limited-liability-company/series-limited-liability-company.html
- https://llc.as.gov/anon
- https://www.irs.gov/businesses/small-businesses-self-employed/single-member-limited-liability-companies
