LLC Structure Examples: Everything You Need to Know
The two main LLC structure examples include a single-member LLC and a multi-member LLC.4 min read
2. Choose Your Management Structure
3. Document Your Choice: Operating Agreement
The two main LLC structure examples include a single-member LLC, which only has one member, and a multi-member LLC which can have an unlimited number of members. One of the best benefits of setting up an LLC structure is that you and other members of the LLC will enjoy greater flexibility in how you run the business.
When forming an LLC, you and the other members have two basic options. You can operate the business yourselves or you can hire one or more managers to handle the operations of your business. At this point, the LLC members will create an operating agreement that determines the management style and sets boundaries for the business.
The Basic Structure of the LLC
LLC structures, sometimes called "Lacs," were initiated in 1977, but these structures only became popular in recent years. A limited liability company merges together many of the great aspects of a corporation and a partnership into one structure type. LLCs give business owners a pathway to obtain liability protection without the risk of double taxation — something that corporations face.
With an LLC, the company's losses and earnings are reported on the members' personal tax return. The LLC taxation structure is like an S corporation, but many business owners prefer the LLC structure in terms of requirements and operations. For example, S corporations limit the number of shareholders to 100, while LLCs can have an unlimited number of members.
When setting up an LLC company, you must determine how you intend to manage the company. Owners have two very distinct management options. First, you can set your LLC up to allow all members to participate in the operations of the business. Secondly, members can decide to hire a manager, a team of managers, or a mixture of nonmembers and members to handle business operations. Members not included in managing the business are considered to be passive investors.
Choose Your Management Structure
Member-managed and manager-managed are the two operational structure options for LLCs. These are the two options based on whether your company is a single-member or multi-member LLC. Most states will automatically consider the LLC to be a member-managed operational style unless otherwise notified. The primary differences between a manager-managed LLC and a member-managed LLC are the ownership-management relationships.
The most common management structure for LLC is the member-management option. With this structure, all members of the LLC play a pivotal role in managing the business and each member has authority within the company. This means that all business transactions and documentation only require one member signature to form a legally binding obligation and the LLC must abide by the agreement. This operational structure is ideal for many LLCs because they are smaller and they have limited resources.
However, there are some instances where a manager-managed structure is the better option. With a manager-managed operating structure, members can select one or multiple nonmembers to handle the company's operations. This person is referred to as the manager of the LLC and has the power to handle all day-to-day operations, including hiring employees and completing transactions.
Other instances when a manager-managed LLC may be the ideal options are when there are too many members to share in the operational duties of the company and when none of the members of management experience. In these instances, bringing in non-member professionals to handle the daily operations of the company may be the best solution. LLCs have the option of hiring a non-member or a member to manage the company.
Document Your Choice: Operating Agreement
Although an operating agreement is not a requirement when creating an LLC, it is still important. This is true even if you're creating a single-member LLC. The operating agreement gives you an opportunity to consider all the details of forming a business, such as who makes decisions, how is the company being funded, and what would happen to the company if you could no longer run it.
In addition, the operating agreement serves as further proof that your business and personal affairs are indeed separate. In turn, this provides greater liability protection. An operating agreement also sets up the company's operational structure.
Understanding LLC structure examples is an imperative step prior to forming this type of business entity. This will allow you to select the best option for you and the LLC itself. If you have formed a multiple-member LLC, please be mindful of your operating agreement. This document will help protect each member, as well as the future success of the company itself.
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