Types of LLCs
When starting a business, one of the first things you need to do is choose the right legal structure. A limited liability company (LLC) is a popular choice among small businesses because it offers some key benefits. However, there are several different types of LLCs, each with its own rules and regulations.
So how do you know which LLC structure is right for your business? This guide looks at what an LLC is, the different types of LLCs, and why each one may be beneficial to your business.
Recommended LLC Service:
Northwest ($29 + State Fees)
What Is an LLC?
An LLC is a type of business structure that combines elements of both corporations and partnerships. Like a corporation, owners of an LLC (known as members) have limited personal liability for the debts and actions of the LLC. And like a partnership, profits and management responsibilities are shared among the members.
What Are the Benefits of Forming an LLC?
There are many benefits to forming an LLC for your business, including:
- Limited Liability Protection: The members of an LLC are not personally liable for the debts and actions of the LLC.
- Pass-Through Taxation: LLCs are not taxed as separate entities but instead treated as pass-through entities. Any profits or losses made by the business are distributed to individual members, who report it on their tax returns.
- Professionalism and Credibility: An LLC can add professionalism and credibility to your business, making it easier to attract investors.
- Flexibility: LLCs have more flexibility in terms of management and decision-making, as there are no set rules like with a corporation. This allows the owners to choose if they want to be managed by members or managers.
- Ease of Setup: Setting up an LLC is usually simpler and less expensive than setting up a corporation. Plus, LLCs have less paperwork and regulatory requirements.
Types of LLCs
There are various types LLCs, each with its own rules and regulations. Depending on the type and needs of your business, you can choose between one of the following types.
Single-Member LLC
A single-member LLC is an LLC with only one member who may or may not manage the business. The owner has full control over all decisions and business operations but is still afforded limited personal liability and pass-through taxation.
Multi-Member LLC
This is an LLC with multiple members who share ownership, management responsibilities, and profits. Each member has a percentage of ownership in the LLC based on their contribution to the business. This type of LLC can be further divided into two types depending on the management.
- Member-managed: The members are responsible for making management decisions and running the business.
- Manager-managed: The members can appoint one or more managers to handle the day-to-day business operations. Manager-managed LLCs are popular among larger, multi-member LLCs where it may be more practical to have dedicated managers.
Series LLC
A series LLC is a special type of LLC that allows for separate divisions or "series" within the same company. Each series operates as its own entity, with separate assets and liability protection.
This type of LLC is often used by companies in the real estate industry, as it allows them to keep each property in a separate series. This can offer additional protection if one of the properties faces legal action or debt. It also makes it easier to manage and track multiple assets within a single LLC.
However, series LLCs may require additional fees for setup and maintenance and are currently recognized in only 18 states (including Washington D.C.):
- Alabama
- Arkansas
- Delaware
- Illinois
- Indiana
- Iowa
- Kansas
- Missouri
- Montana
- Nebraska
- Nevada
- North Dakota
- Oklahoma
- Tennessee
- Texas
- Utah
- Virginia
- Wyoming
L3C
An L3C, or low-profit limited liability company, is a business that combines elements of both for-profit and nonprofit businesses. The main purpose of an L3C is to solve a social or environmental problem while still making a profit.
L3Cs usually have a new or creative solution to a societal problem. Still, they may not qualify as a nonprofit due to their profit-making activities.
L3Cs also have the potential to attract investment from both nonprofit foundations and for-profit businesses. This makes it a unique funding opportunity for social ventures. L3Cs are currently offered in about 11 states:
- Illinois
- Maine
- Michigan
- Louisiana
- Rhode Island
- Utah
- Wyoming
- Vermont
Anonymous LLC
An anonymous LLC is a type of LLC where the owner's personal information is not publicly available. This offers increased privacy and protection from potential lawsuits or creditors. In addition, the owner's name will not be listed on the Articles of Organization or in public records, and they can use a special representative for all official business matters.
However, it's important to note that while personal information may be kept private, all financial and business information will still be public. Anonymous LLCs are only recognized in four states, including:
- Delaware
- Nevada
- New Mexico
- Wyoming
Restricted LLC
A restricted LLC is a type of LLC in which the ownership and management are limited to a specific group or class of individuals. This can include employees, family members, or investors with a certain level of qualification.
The restrictions on ownership and management are stated in the operating agreement and may change over time as qualifications are met or circumstances change.
This type of LLC can offer a more organized and safe environment for ownership and management. As a result, it is often used in real estate investments, where the owner wants to ensure their interest in the property remains within a certain group.
As of 2022, only Nevada recognizes restricted LLCs.
PLLC
A professional LLC, or PLLC, is a limited liability company formed by licensed professionals such as lawyers, doctors, architects, and accountants. These individuals are usually not allowed to form traditional LLCs in some states due to professional licensing laws.
A PLLC offers the same benefits as a traditional LLC but also allows licensed professionals to practice their profession under the protection of limited liability. However, it is important to note that only 29 states currently recognize PLLCs, and they may have additional fees and requirements for formation and operation.
How to Choose the Right Type of LLC for Your Business
There is no one "right" type of LLC for every business. Therefore, it's important to consider the specific needs and goals of your business, as well as the regulations and limitations of your state, before choosing a type of LLC.
For example, a licensed professional may benefit from forming a PLLC, while a real estate investor may find a restricted LLC to be more suitable. At the same time, a business with multiple owners can also benefit from either a member-managed or manager-managed multi-member LLC, depending on how they choose to manage the business.
Nevertheless, keep in mind that the structure of an LLC is not permanent. As such, it’s possible to convert from one type of LLC to another or change the management structure as your business grows and evolves. Therefore, it's important to carefully and regularly check the type of LLC that will best suit the needs of your business.
Furthermore, consulting with a lawyer or accountant can also help determine the best structure for your business. These professionals will use their knowledge and experience to advise you on the best structure for your specific situation.
Remember, choosing the right type of LLC can help provide protection and structure for your business, setting you up for continued success. We recommend a legal or financial professional for more information on which structure may be right for you.
Frequently Asked Questions
LLCs are typically used for small businesses, as they offer liability protection and flexibility in management and ownership structure. However, they can also be used for real estate holdings, investments, and holding companies. It's important to discuss the specific needs of your business with a legal or financial professional to determine if an LLC is the right structure for you.
Yes, an LLC can have multiple owners, also known as members. However, depending on the state, there may be limits on the number of members allowed in an LLC.
Yes, LLC ownership can be transferred as long as it follows the operating agreement and any applicable state laws.
Yes, an LLC can have employees. However, the owners may need to follow certain regulations and procedures, such as obtaining worker's compensation insurance and withholding taxes from employee paychecks.
In most cases, an LLC can continue to operate if a member leaves or passes away. This is something that should be stated in the LLC's operating agreement. If this happens, the LLC might need to appoint a new member or buy out the ownership interest of the departing member. It is important to have a clear understanding of what will happen in these circumstances in the operating agreement.
An LLC does not typically have a board of directors, as the members or managers make the decisions for the company. However, in some states, an LLC may be able to appoint a board of directors through a structure known as a limited liability company corporation (LLC-C). This should be discussed with a legal or financial professional.