Types of LLC

There are several types of LLC, or Limited Liability Company, just depending on the industry. An LLC is a business formation structure that allows the business members to avail themselves of moderate liability as well as more favorable tax treatment under the tax code. Since the 19th century, there have generally been three forms of business entities:

  1. Sole proprietorship
  2. Corporation
  3. Partnership

The LLC was not invented until the latter half of the 20th century (1977). Wyoming created the LLC to address the needs of its business that wanted to be managed and taxed in a manner more closely resembling partnerships, while still being afforded the liability protection offered to corporations.

Common LLC Terms

In order to determine whether to form an LLC, you should familiarize yourself with the common nomenclature used to discuss LLCs. A member is simply an individual who has on ownership interest in an LLC. Members are the individuals responsible for managing the LLC, unless the LLC’s Articles of Organization state otherwise.

Ownership Percentages with LLCs

Similar to the manner in which a corporation issues shares of stock, LLC ownership can be expressed through memberships units or by percentage of ownership. More importantly, ownership conveys upon its members the right to vote and share in the LLC’s profits.

LLCs Compared to Corporations

LLCs are structured similarly to corporations in that the members may initiate a business without having to worry about any of the risks that may arise in a structure that allows for unlimited liability. In addition, upon the creation of an LLC, various state laws have created some advantages for LLCs over corporations, mainly around tax treatment.

Understanding Sole Proprietorships

How does a sole proprietorship differ from an LLC? A sole proprietorship will automatically exist when an individual is engaged in a business for himself/herself without the protections offered by a corporation, Limited Partnership or an LLC. If your children were to sell lemonade on the street outside your home, that would be considered a sole-proprietorship. Establishing a sole proprietorship is a relatively easy process, so much so that you could start one and not even realize you are a part of one. For example, if you were ever to do contract work for an organization and you were not on that organization’s payroll, you would be considered a sole-proprietor.

Understanding General Partnerships

A partnership is a type of business formation in which the individuals in the partnership must share both the risk and benefits that come with running the business. Partnerships could include the presence of general partners who would assume the burden of liability for any partnership debts and ultimately for all actions of the partnership. It should be noted that in a general partnership all partners are general partners.  As such, all general partners must participate in the ongoing daily operations and will bear the responsibility for the debts and liabilities of the partnership.

A sole proprietorship that takes an action to bring on a partner will form a general partnership once that initial partner has been on boarded. General partnerships are similar to LLCS, except in a general partnership the general partners do not need to make required filings, and they are not protected from liability.

Understanding Limited Partnerships

Given that limited partnerships are generally more expensive and complicated to establish than LLCs, most small-business owners do not form limited partnerships. In addition, limited partnerships have limit the power of the limited partners to make decisions. As such, limited partnerships are frequently used for estate planning purposes. You may think of limited partnerships as a cross between an LLC and a general partnership.

Which Business Type in Which State?

The types of business formation structures are established by the legislature in each state.  It is within a state’s power to allow only specific types of business structures. As such, many states have passed regulations and limitations on the types of businesses that can be established and by whom.

Understanding Professional Corporations (PCs)

Doctors, lawyers, accountants, and architects generally for professional corporations (PCs), which is a specific type of corporation available to designated professionals. In certain states, professionals may form a corporation, but each professional remains liable for his/her professional actions.

Limited Liability Partnerships (LLPs)

Limited Liability Partnerships (LLPs) are a business formation structure that includes general partners.  However, all general partners in an LLP are able to shield themselves from any liability resulting from the partner or employee actions. LLPs are very similar to LLCs, but LLPs operate within the confines of the partnership rules.

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