What Are the Different Types of LLC?
A limited liability company (LLC) is a legal business entity structure that offers owners personal risk protection and a bevy of flexible tax options. This entity type is a reliable choice for new business owners and startups because it limits the risk of an owner's personal assets being seized to pay the debts and obligations of the company.
Additionally, owners can elect a pass-through tax status. That means any business profits bypass taxation at the corporate level and are assessed entirely on an owner's personal income tax return. This avoids the double taxation issue common with corporations that choose C corporation (C-corp) tax status.
LLCs are easy to organize and maintain so long as you register the business with the state, pay the renewal fees, and follow the required formalities. Still, there are many facets to LLCs, and not all of them are apparent at first glance. LLCs come in a variety of different types, which can vary from state to state. Knowing about these LLC types and where they are available can help you decide which one is right for your business.
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- LLCs limit personal asset risk while affording owners various tax options, such as avoiding a corporate tax by electing an S corporation (S-corp) tax status.
- The diverse needs and goals of LLC owners have necessitated creating different types of LLCs.
- LLCs all have similar characteristics (such as limited liability and pass-through taxation) but come in all shapes and sizes.
- Some LLC types are only available in certain states, so check with your state's governmental business authority (such as the secretary of state) to determine what's available to you.
Understanding Different Types of LLCs
You might be thinking that LLCs seem straightforward. The good news is they pretty much are! However, the many intricacies of business have necessitated the creation of different types of LLCs over time.
LLCs are governed by the states in which they are organized. Organizing an LLC means you've registered the business with the state's governmental business authority (typically, a secretary of state). This process includes drafting an operating agreement between the owners and filing articles of organization with the state. Once organized, the LLC is created, and the government will view it as a separate legal entity from its owner. This means your personal assets are protected if the LLC has debts or faces a lawsuit.
A critical point in organizing your company will be choosing what kind of LLC your business will be. For an important decision like this, you will need to research what types of LLC are offered in the state where you plan to organize. Here are a few types of LLCs that are worth being aware of; they are each described in detail further below:
- Single-member LLCs
- Multiple-member LLCs
- Member-managed LLCs
- Manager-managed LLCs
- Professional limited liability companies (PLLCs)
- Family limited partnerships
- L3C companies
- Series LLCs (only available in Delaware, Nevada, Iowa, Illinois, Tennessee, Oklahoma, Utah, and Texas)
- Restricted LLCs (only available in Nevada)
- Anonymous LLCs (only available in New Mexico)
Note that these types are not exclusive and can often apply to the same LLC. Sometimes, a manager-managed LLC will also be owned by single-member, and vice versa. It's worth checking with your state to see which structure best fits your business.
Single-member LLCs are recognized in every state and are the most common type of LLC. Here, the word "member" is a stand-in for "owner." Single-member LLCs have an individual owner. The Internal Revenue Service (IRS) treats them as sole proprietorships for tax purposes.
As you might've guessed, multiple-member LLCs are simply LLCs with multiple owners. Multiple-member LLCs are structured similarly to general partnerships. All owners are responsible for the debts and obligations of the company, but their personal assets are still secure. Members each have the option to decide how they want to pay taxes on their share of the business's profits.
This is an LLC that the members, or owners, of the company manage. The decision of whether to be member-managed or manager-managed is made when the LLC organizes. Of the two, member-managed LLCs are more common in the United States.
In member-managed LLCs, the members decide on managers and ascribe responsibilities and duties. Managers are named in the operating agreement, which the owners then sign. Owners can be managers. Any owners who aren't also managers are not required to partake in the management of the business if they do not wish to.
These are LLCs for industries that require professional licensure. They are a typical structure for accountants, doctors, and lawyers. PLLCs ensure that owners are not legally responsible for the malpractice of other owners.
Requirements for PLLCs can be different from state to state. If you're an owner in an industry requiring state licensure, it's best to consult your state's governmental business authority to determine what's needed.
L3Cs are for-profit entities formed for humanitarian efforts. L3Cs are often chosen for their pass-through taxation and their similarity to non-profits.
Series LLCs take the company's debts and obligations and attribute them to smaller units within the LLC, called series. These units can include owners, managers, and other company assets.
Suppose that a series LLC has designated its debts and obligations to you, an owner of the company. In this circumstance, these debts and obligations are your responsibility and can be enforced if commitments are not met. It can often be a big responsibility for designated units of a series LLC.
This type of LLC is currently only available in Delaware, Iowa, Illinois, Nevada, Oklahoma, Tennessee, Texas, and Utah.
Restricted LLCs work a little differently for business owners than more traditional formats. That's because owners have a 10-year waiting period from organizing before they can start receiving business distributions.
Restricted LLCs are only available in Nevada.
Anonymous LLCs are for owners that want to keep their company's details private. Here, information access is restricted, so the public cannot obtain details on ownership and structure.
Anonymous LLCs are currently only available in New Mexico.
Need Help Deciding Which Type of LLC to Choose?
There are many types of businesses out there. Choosing the proper business structure is an essential step in forming an LLC. The laws applying to LLCs differ from state to state. While this affords owners more options, it often means doing a lot of research. When you have questions, there's no better option than contacting a local small business attorney.
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