What Are the Different Types of LLCs?

What are the different types of LLCs is a common question that many entrepreneurs have when going through the process of starting a new company. Each type of LLC, or Limited Liability Company, possesses different advantages and disadvantages. An entrepreneur should consider these pros and cons when choosing the type of LLC that best suits their needs. The different types of LLCs are as follows:

  • Single-member LLC
  • Multiple-member LLC
  • Member-managed LLC
  • Manager-managed LLC

What Is an LLC?

The LLC is a business type created under state rather than federal law. An LLC grants you personal liability protection.

In terms of taxes, LLCs share many similarities to S corporations. Business expenses and income for an LLC are reported on the personal tax returns of the members.

If an LLC only has one owner, the sole owner is seen as an entity that is "disregarded," which means that the owner needs to use Schedule C of Form 1040 to report the income and expenses of the LLC. Sole proprietors also use Schedule C of Form 1040.

Should You Start an LLC?

You should consider starting an LLC if any of the following is true:

  • You expect losses for your startup company for the first few years and you want to pass these losses through to the owners.
  • You value being able to use flexible accounting methods. Unlike C corporations, LLCs don't need to rely on the accrual accounting method.
  • Your business will have ownership of real estate.
  • You value flexible management. LLCs are able to have more flexible management structures in comparison to other types of companies
  • You want to reduce the number of ongoing formalities. Corporations have to hold meetings annually with the shareholders and directors. Corporations also need to keep records and documents for all significant business decisions and corporation meetings. The same is not true for LLCs.
  • You want to be able to share the profits of the small business among the owners.

Advantages of LLCs

LLCs are characterized by the flexibility of their business structures. Owners of LLCs have a lot of freedom in terms of how their business is formed, organized, and managed.

Some LLCs are formed for the purpose of providing professional services, such as legal services and medical care. Other LLCs are formed for the purpose of benefiting from interstate commerce laws.

The state of Wyoming invented the LLC in 1977 to fulfill a need. At the time, there were many businesses that wished to be taxed and managed like partnerships while still receiving the protection from liability that corporations enjoy.

Under state law, an LLC is a legal person. Accordingly, the law grants LLCs various rights and responsibilities. For example, an LLC needs to comply with laws and has the right to do business. 

Just like a corporation, an LLC is a distinct and separate legal entity.

An LLC is able to obtain a tax identification number, do business, and open up a bank account. All states give entrepreneurs the ability to create an LLC by filing the Articles of Organization.

Contrary to popular belief, an LLC is not a corporation. However, an LLC enjoys the liability protection of corporations as well as other advantages, such as ease of formation.

Tax-wise, a multiple-member LLC is treated like a partnership while a single-member LLC is treated like a sole proprietorship. Entrepreneurs also have the option of having their LLC taxed like an S corporation.

A limited partnership offers liability protection for only certain partners. On the other hand, an LLC offers liability protection for all members and managers.

In some states, single-member LLCs are not allowed. If your state does allow single-member LLCs, you should still consider getting a partner for purposes relating to liability.

Many people believe that LLCs are similar to corporations when they are truly different. Not only are LLCs and corporations taxed differently, but they also enjoy charging order protection, which is an extra layer of liability protection. However, the IRS does not have an official category for LLCs when it comes to their tax classifications.

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