Like ice cream, the limited liability company business structure has several varieties. Which will best suit your business clients' tastes and needs? In this article, I'll describe the types of LLCs and what kinds of businesses they might be most beneficial for.
But before I delve into the various types of LLCs, let's revisit the main characteristics of the LLC structure that make it a popular choice for many business owners.
A limited liability company:
- Is a separate legal entity from its owners and therefore offers personal liability protection;
- Is a pass-through entity for tax purposes;
- Has tax flexibility via the option of S corporation election (if it meets the IRS's qualification criteria); and,
- Is simple to form and has relatively few ongoing compliance formalities.
LLC considerations
As your clients decide on the business entity type that will offer the most advantages — legally and financially — they'll have much to consider. Below, I've listed some things I encourage you to ask them to think about as they explore their LLC options. In addition to the guidance you can give them, also reinforce that getting advice from a licensed legal professional can help ensure they select the ideal entity:
- How many owners (members) will the LLC have?
- Will the LLC members be actively involved in the everyday operations of the business?
- Will the LLC operate in one or multiple states?
- Are the LLC members licensed professionals, such as attorneys, accountants, engineers, physicians, etc.?
- Will the LLC involve multiple business opportunities that operate somewhat independently — e.g., rental properties?
Types of LLCs
Some of the LLC types below overlap a little. For example, a single-member LLC can also be a member-managed LLC. That's where the questions I suggested clients consider can bring clarity to which LLC features will fit their situation most appropriately.
Note that the limited liability structure is a state construct, and LLC rules and requirements vary from state to state. While most of the LLC types listed here are available in many states, some states do not recognize all of them. It's critical for business owners to research the options available to them in the state(s) where they intend to operate.
- Single-member LLC: A single-member LLC is a limited liability company with one owner. By default, a single-member LLC is taxed as a sole proprietorship. It's an attractive entity choice for an individual owner or a married couple who jointly owns a business.
- Multi-member LLC: When an LLC has more than one owner, it's considered a multi-member LLC. By default, a multi-member LLC is taxed as a general partnership. The structure is a popular option for co-owners who want the liability protection of a corporation without all the corporate compliance formalities. While it's recommended that all LLCs (even those owned by just one member) have an LLC operating agreement, it's especially beneficial for multi-member LLCs. An operating agreement sets forth members' and managers' rights and responsibilities, internal operations, decision-making, and dispute resolution.
- Domestic LLC: An LLC is a domestic LLC in the state where it has registered its formation documents (articles of organization). That state is called the domestic LLC's domicile or home state.
- Foreign LLC: If an LLC is registered as a domestic LLC in one state and conducts business in another, it must get permission to operate as a foreign LLC in the other state. That involves a filing called foreign qualification. The rules for what constitutes "conducting business" or having
nexus in a state vary and change often. Therefore, it's critical for business owners operating in multiple states to carefully research the requirements and talk with trusted legal and tax professionals so they understand their obligations. - Member-managed LLC: An LLC is member-managed when the owners are actively involved in the day-to-day operations and management of the business. In my experience, this is the management structure most LLCs choose.
- Manager-managed LLC: If LLC members would rather be hands-off with the day-in, day-out management of the company, they can instead appoint or hire one or more managers to handle the daily operations. As a manager-managed LLC, the members primarily oversee higher-level decisions or are passive investors in the business.
- Professional LLC : A PLLC is a limited liability company owned by licensed professionals, such as doctors, accountants, engineers, attorneys and architects. Some states require professionals with certain licenses to form a PLLC rather than a standard LLC. While the process to form a PLLC is similar to creating a regular LLC, there may be additional steps, such as getting the professionals' state licensing board to approve the entity's formation documents.
- Series LLC: With a series LLC, business owners can have multiple LLCs (series) under the umbrella of another LLC ( "master" or "parent" LLC). Each individual LLC within a series typically has its own assets, members, managers, rights, debts and obligations. The main advantage of the series LLC structure is that each LLC in the series is protected from the liabilities and debts of the other LLCs. That can benefit entrepreneurs who want to keep multiple business opportunities under one company while giving them autonomy — e.g., real estate investors with separate rental properties and restaurateurs with multiple eatery locations. The series LLC is not available in all states, and how series LLCs are taxed varies. Some states treat each LLC in the series as a separate tax entity, while others treat the master LLC and all series beneath it as one tax entity. While it appears the IRS currently allows series LLC owners to file one federal tax return (covering the master LLC and all series), that may change in the future. Series LLCs are more legally complex to form and maintain, so it's helpful to get guidance from an attorney when setting them up.
Decisions, decisions
