Key Takeaways

  • LLCs can be classified by taxation status (e.g., partnership, S corp, C corp) or member structure (e.g., single-member vs. multi-member).
  • Classes of membership interests can be created in the LLC operating agreement to define different rights and privileges.
  • Series LLCs allow for separate “classes” or “series” under one parent LLC, providing internal asset protection.
  • Custom LLC classes can support specific ownership rights, profit-sharing ratios, or voting structures.
  • Clear classification helps optimize liability protection, tax benefits, and business control.

LLC classes are the various classes of LLCs that operate in the business world. Specifically, the LLC, also referred to as a Limited Liability Company, is a separate and distinct business from its owners. The owners of the LLC, also called members, have great flexibility in how to manage the LLC. That is because there are few formalities when forming and operating an LLC, as opposed to a corporation.

What Are the Different LLC Classes?

The reason for the various classes of LLCs is due to the fact that the Internal Revenue Service (IRS) doesn’t view the LLC as a legitimate business structure for federal tax purposes. Therefore, after forming an LLC, the business owners must determine how they want to be taxed. They can be taxed in one of the following ways:

  1. Partnership
  2. C Corporation
  3. S Corporation

Keep in mind that even if the LLC is taxed in this manner, that doesn’t mean that the LLC is operating as any of the above business structures; the LLC will still offer the same benefits of limited liability protection and management flexibility for its owners.

Additional Ways to Classify LLCs

In addition to tax status, LLCs can be categorized based on structure and business strategy. These classifications include:

  • Single-Member vs. Multi-Member LLCs: A single-member LLC has only one owner, while a multi-member LLC includes two or more owners. Both offer limited liability protection, but taxation and reporting requirements can differ.
  • Member-Managed vs. Manager-Managed LLCs: In a member-managed LLC, all members participate in the day-to-day operations. In a manager-managed LLC, designated managers (who may or may not be members) handle operations.
  • Series LLCs: A less common but growing structure, a Series LLC allows the formation of multiple “series” within one overarching LLC. Each series can hold assets, have its own members, and operate independently, potentially shielding each series from liabilities incurred by others.

These structural classifications impact how your LLC functions, so it's important to align your setup with your business goals.

Partnership Taxation

If the LLC chooses to be taxed as a partnership, the owners will report the business profits and losses on their own personal income tax returns. Depending on the percentage of ownership that each owner has, some owners might be reporting greater profits than others on their personal tax documents.

C Corporation Taxation

If the LLC chooses to be taxed as a C corporation, the LLC will be required to pay federal taxes. Therefore, the business will pay taxes on the business’s profits and losses the same way in which a C corporation does.

S Corporation Taxation

If the LLC chooses to be taxed in this manner, the profits and losses from the business will pass through to the owners, who will report it on their individual tax returns, similar to that of a partnership. Keep in mind, however, that in order to qualify as an S corporation for tax purposes, the LLC must qualify to do so. For example, the LLC cannot have more than 100 owners, all of whom must be U.S. citizens or residents. The owners cannot be non-resident aliens, other corporations, or other LLCs.

Limited Liability Protection

The LLC members benefit from limited liability protection in the same way that corporate shareholders do. This means that members’ personal assets cannot be used to satisfy the business’s outstanding debts. Therefore, such members need not worry about losing their home, car, investments, cash, etc. However, an exception does exist in which a plaintiff might be able to pierce the corporate veil, and hold the member liable. However, this is very rare in the LLC and is mostly seen in a corporation. But, if the member engages in fraudulent or otherwise illegal activity, then he will be held personally liable.

LLC Membership

LLC membership can vary, depending on how much ownership percentage each member holds. However, unlike the corporation, transferring ownership is difficult, and can result in involuntary dissolution of the LLC if a member leaves the business. That’s why it is crucial for an LLC to draft an operating agreement to identify the decision-making process and policies/procedures for such membership transfer and dissolution.

Custom Classes of LLC Membership

LLCs can create custom classes of membership, similar to corporate share classes, through provisions in the operating agreement. These custom classes define different rights and responsibilities, which may include:

  • Voting vs. non-voting rights
  • Different profit or loss allocations
  • Priority in distributions or liquidation
  • Authority to make or block major decisions

Creating distinct membership classes can be useful when bringing in investors or differentiating levels of control. For example, founding members may retain Class A units with full voting rights, while investors receive Class B units with economic interests only.

To implement these, the LLC’s operating agreement must clearly define each class’s rights, restrictions, and how new members may be admitted or classes changed.

LLC Operating Agreement

The LLC operating agreement is a document that will include such membership transferability as well as other significant business decision items. The information to be addressed in this document includes:

  1. Member ownership percentages
  2. Voting rights
  3. Duties and responsibilities of members
  4. Who will manage the LLC (member-managed vs. manager-managed)
  5. How profits and losses will be distributed among members for tax purposes
  6. How buyouts will be handled
  7. How the members will handle lending contracts
  8. What happens if a member passes away, gets divorced, becomes disabled, or wants to leave the business

The operating agreement might need to be amended; therefore, it is important that for any changes being made, the operating agreement addresses those changes. Thereafter, all members should receive copies of the operating agreement. The document should also be kept on file for future reference.

Series LLCs and the Operating Agreement

If you opt to form a Series LLC, it’s critical that your operating agreement explicitly outlines how each series will operate. Key considerations include:

  • The assets and liabilities associated with each series
  • Management structure for each series
  • How each series reports financial performance
  • Procedures for creating or dissolving a series

Not all states recognize Series LLCs, so confirm eligibility in your state before choosing this structure. When properly implemented, this model provides a cost-effective way to separate liability between multiple ventures while maintaining centralized administration.

Frequently Asked Questions

  1. What are the main classes of LLCs?
    LLCs are typically classified by tax election (partnership, S corporation, C corporation), but can also be categorized as single-member or multi-member, and member-managed or manager-managed.
  2. Can an LLC have different membership classes?
    Yes. LLCs can create custom membership classes with varied rights to profits, voting, and decision-making. These are defined in the operating agreement.
  3. What is a Series LLC?
    A Series LLC allows for multiple “series” under one LLC umbrella. Each series can have separate assets, members, and liabilities. Not all states permit Series LLCs.
  4. How does tax classification affect an LLC?
    Your chosen tax classification affects how the IRS treats the LLC’s income. Options include default pass-through taxation or electing S corp or C corp status.
  5. Do I need a lawyer to create LLC classes?
    While not required, consulting a lawyer helps ensure your operating agreement properly defines membership classes, especially when investors or custom rights are involved.

If you need help with learning more about LLC classes, or the LLC business structure and electing tax status, 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, Menlo Ventures, and Airbnb.