Key Takeaways:

  • LLCs offer various structures depending on ownership, management, and purpose, including single-member, multi-member, professional, and anonymous LLCs.
  • Some types of LLCs are designed for specific industries, such as PLLCs for licensed professionals or L3Cs for social enterprises.
  • Special types like Series LLCs and Restricted LLCs offer unique liability and asset protections in select states.
  • Choosing between a member-managed or manager-managed LLC is essential for operational efficiency, especially when passive investors are involved.
  • PLLCs (Professional LLCs) cater to licensed professionals like doctors and attorneys.
  • Foreign LLCs enable businesses to operate in multiple states.
  • Domestic LLCs refer to businesses operating within their formation state.
  • Nonprofit LLCs combine limited liability with a charitable mission.
  • Tax classifications for LLCs—like disregarded entities, partnerships, or corporations—affect tax obligations and business operations.
  • An attorney on UpCounsel can help determine the best LLC structure for your business.

What Kind of LLC Do I need?

An LLC is a business created by a statute and governed by the laws of its operating state. The business structure uses pass-through taxation of a sole proprietorship or a partnership combined with the limited liability of a corporation. This is an ideal situation for most business owners.

Each state has its own rules regarding LLCs, but the legal structure is similar. The owner of an LLC is a member, and LLCs can have one member or multiple members.

Forming an LLC provides the ability to keep your personal and business assets separate, results in a much lower amount of paperwork than a traditional corporation, and has the additional flexibility in tailoring your company to your situation.

Some LLCs are designed for professional services, such as doctors or lawyers, while others are used to take advantage of interstate commerce laws. Smart business owners often use LLCs over corporations to benefit from the personal liability protection without dealing with red tape, paperwork, or formalities that can be difficult for a small business, young business, or sole entrepreneur. On UpCounsel's marketplace, you can talk to an experienced business lawyer posting a job for free and get proposals in 24h. 

Single-Member LLC/Sole Proprietorship

As the name suggests, a single-member LLC has a single owner. This is similar to a sole proprietorship in that the owner is personally responsible for:

  • Company transactions
  • Taxes
  • Debts the business owes. 

A single-member LLC is automatically classified as a 'disregarded entity' for tax purposes unless it elects to be taxed as a corporation. LLCs can also be taxed as a corporation.

Single-member is the most popular filing type and is the most affordable LLC formation. There is also significantly less paperwork required.

Professional Limited Liability Company (PLLC)

A Professional Limited Liability Company (PLLC) is designed for licensed professionals, such as doctors, lawyers, accountants, architects, and other service providers requiring state licensing. Some states mandate PLLC formation for such professionals to ensure compliance with industry regulations. While PLLCs offer limited liability, they generally do not protect members from malpractice claims. Each professional is still personally responsible for their professional actions. However, the PLLC can protect against liabilities stemming from the actions of other members.

General Partnership

When an LLC is formed with multiple members, it is generally taxed as a partnership by default. This means that all owners take responsibility for transactions, debts, and taxes from the business. Each member can also determine when assets are sold, and he or she pays taxes on his or her business income share.

The LLC is helpful for a small- or medium-sized business. General partnerships and limited partnerships are similar in that multiple people share responsibilities. But one important difference is that a single member has to maintain total liability. This also leaves one member to keep the least liability.

Multi-Member LLC

A Multi-Member LLC is formed when two or more individuals own the business. This structure offers flexibility in member responsibilities, profit-sharing, and taxation. It is taxed as a partnership by default, meaning members report their share of profits and losses on their personal tax returns. Multi-member LLCs also benefit from limited liability protection, safeguarding personal assets from business debts and legal claims. A comprehensive operating agreement is crucial to define member roles, profit distribution, and dispute resolution.

Family Limited Partnerships

Family limited partnership structure is similar to a limited partnership, except that family members own it. Families usually form an LLC as a limited or general partnership and put their property into the company. They can also designate control and change the membership to give other relatives complete control of their property.

Series LLC

Series LLCs are business entities that designate debts, obligations, and rights to smaller cells, which are called series. This can include:

  • Members
  • Managers
  • Assets
  • Interests.

Delaware was the first state to offer series LLC formation, and currently they are only available in:

  • Nevada
  • Iowa
  • Illinois
  • Tennessee
  • Oklahoma
  • Utah
  • Texas. 

Though it's only available here, the debts and liabilities of each unit are generally only enforceable against that unit. Each unit is taxed separately as well, though the individual cases will be considered according to their situation.

Foreign LLC

A Foreign LLC is a business registered in one state but operating in another. “Foreign” does not mean international; it simply refers to doing business across state lines. For example, if you form an LLC in Texas but operate in California, you would register as a foreign LLC in California. Foreign qualification typically requires filing an application, appointing a registered agent in the foreign state, and paying the required fees. Compliance with each state’s regulations is essential to maintain good standing.

Restricted LLCs

A restricted LLC is a form of limited liability company that is presently only available in Nevada. It began in 2009. The Articles of Organization are restricted for this type of LLC, meaning there is a 10-year waiting period after its formation before LLC members can receive business distributions.

Domestic LLC

A Domestic LLC is an LLC that operates within the state in which it was originally formed. This is the most common type of LLC for small businesses that operate in a single state. Domestic LLCs must comply with their home state’s requirements regarding annual filings, taxes, and operating agreements.

L3C Company

L3C companies are for-profit institutions for a philanthropic purpose. These companies offer many of the same tax benefits of a limited liability company, while also providing the prestige of a not-for-profit institution and the marketing strategies that are commonly associated with a social enterprise. 

Nonprofit LLC

A Nonprofit LLC is a limited liability company formed for charitable, religious, or educational purposes. Unlike traditional nonprofits, a nonprofit LLC can have members, and its profits must be reinvested into the organization’s mission. Nonprofit LLCs can apply for tax-exempt status under IRS Section 501(c)(3) if they meet eligibility criteria. This structure combines liability protection with a nonprofit’s social mission, making it suitable for charitable ventures that also require operational flexibility.

Anonymous LLC

Anonymous LLCs are companies where ownership details are restricted for viewing by the public. Presently, only New Mexico allows formation of a completely anonymous LLC.

Member-Managed LLC or Manager-Managed LLC

When forming an LLC, you must set up your desired structure in the operating agreement. This gives you the option of member-managed or manager-managed LLC. 

A member-managed LLC is run by the owners of the company, and it's the simplest structure. Every owner has the authority to act on behalf of the business. 

A manager-managed LLC is used when there are passive members of the LLC, like investors. 

Tax Classifications for LLCs

LLCs are unique in that they can choose how they are taxed. The IRS allows LLCs to select from the following tax classifications:

  • Disregarded Entity: Single-member LLCs are treated as sole proprietorships for tax purposes unless they elect otherwise. The business’s income is reported on the owner's personal tax return.
  • Partnership: Multi-member LLCs are taxed as partnerships by default. Members report their share of profits and losses on their individual tax returns.
  • Corporation (C-Corp): LLCs can elect to be taxed as a corporation, meaning the company pays corporate income tax, and dividends distributed to members may be taxed again at the individual level.
  • S Corporation: LLCs can also choose to be taxed as an S Corporation, which allows profits to pass through to members while potentially reducing self-employment taxes.

Selecting the appropriate tax classification is critical as it affects income tax, self-employment tax, and the complexity of tax filings.

Frequently Asked Questions:

1. What is the most common type of LLC?

The single-member LLC is the most common type, offering simplicity, liability protection, and pass-through taxation.

2. What is the difference between a PLLC and a standard LLC?

A PLLC is specifically for licensed professionals and often required by state law, while a standard LLC can operate any legal business.

3. Can an LLC operate in multiple states?

Yes, an LLC can operate in multiple states by registering as a foreign LLC in each state where it conducts business.

4. What is the advantage of a Series LLC?

A Series LLC allows businesses to segregate assets and liabilities into separate series, protecting each series from the debts of others.

5. How does an LLC choose its tax classification?

LLCs can default to sole proprietorship or partnership taxation or elect to be taxed as a C Corporation or S Corporation by filing IRS Form 8832 or Form 2553.

If you need help with the different types of LLCs, 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.