Different LLC Types: Everything You Need to Know
There are different LLC types, but which is the best legal structure for your business? 4 min read
Different LLC Types
There are different LLC types, but which is the best legal structure for your business? This is one of the most important and significant decisions that you will make during the startup process.
Know that each business entity has its own pros and cons; it is important to understand your options and sort through the various types before settling on one. The choice of a business entity type can affect how you run your business. It can impact everything from liability to taxes and even control of the company.
You must figure out what entity type will provide your business with the most advantageous setup and, in turn, will help you to realize your organizational and personal goals.
State law controls business entity types, which are through each state’s business division or corporation’s office.
There are states that allow certain types of businesses that other states do not; many states have varied regulations and limitations on what business type can be established in that jurisdiction and who or what can organize each business type.
To determine what your options are, you should check with your state’s secretary of state office (some states have a different term for this department) and the state’s business division to determine what business entity types are available in your jurisdiction.
Over the last several years, the LLC model has become the hot business structure in respect of startups.
- personal liability protection minus the red tape,
- less paperwork and formalities that may be otherwise burdensome for startups, small businesses and solo entrepreneurs.
Still, many small business owners are surprised when they hear that there are choices for your LLC.
1. Single Member LLC (SMLLC) v. Multiple Member LLC. The difference between the two is as the name implies. An SMLLC has a single owner, whereas a multi-member LLC will have multiple owners.
For instance, Janet started her own social media consulting business. She is the sole owner with plans to hire some account managers and various other employees. In such an instance, Janet could form an SMLLC because income from an SMLLC is not divided with anyone and there are no separate taxes to file.
With respect to an SMLLC, the IRS treat it like a sole proprietorship. However, an LLC has the option of being taxed as a corporation.
If, however, Janet wanted to launch the consulting business a colleague so there would be two owners, then the two of them can form a multi-member LLC.
A member-managed LLC means that the LLC is run by the members (or owners) of the company. It is the simplest structure. It provides every member with the authority to act on behalf of the LLC, i.e. negotiate a business loan, deal with contracts, and handle other operational and financial aspects of the business.
If, however, there are passive members involved in the LLC, a manager-managed structure is probably more suitable. This means that the LLC members will appoint a manager or managers who have the authority to run and operate the business.
Note that in most states, the default rule is that an LLC is member-managed. If you do not delineate the management structure in the formation documents that is filed with the secretary of state, the LLC will be member-managed.
3. Domestic or Foreign LLC. In this context, domestic or foreign means the state where the LLC is registered and operates. For example, an LLC that is registered in Michigan and operates in Michigan is as a domestic LLC. If the same LLC operates business in Illinois, through a physical presence in Illinois, it has a foreign LLC in Illinois.
Such a situation commonly occurs when an LLC is created in jurisdictions that have business-friendly tax laws but does its business in its home state. HI s also occurs when a business expands to other states.
By law, a foreign LLC must register with the Secretary of State in the foreign state. It must also satisfy the foreign state’s regularity and tax requirements.
Know that simply having a client or doing business with customers in another state does not necessarily mean that you must register your foreign LLC in that state.
If you need help with setting up your LLC, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Stripe, and Twilio.