Many business owners don't realize the limited liability company structure has several variations.
LLC, PLLC, foreign LLC, series LLC, member-managed LLC, manager-managed LLC — oh, my! Indeed, there's more to the LLC entity type than people realize. Which type of LLC is right for your clients? That will depend on various factors. Let’s look at several different types of LLCs and what clients should consider when deciding on the right one for their business.
Single-member LLC vs. multi-member LLC
Single-member LLC: If a company has just one owner (or a married couple as the owner), it is considered a single-member LLC. A single-member LLC is a separate legal entity from its owner. It is by default treated as a disregarded (pass-through) entity for tax purposes unless the owner elects to be taxed as a corporation (or S Corporation).
Multi-member LLC: When an LLC has more than one owner, it is considered a multi-member LLC. A multi-member limited liability company is a separate legal entity from its owners. Unless its members elect to be taxed as a corporation (or S corp), the IRS will treat the company as a partnership.
Member-managed LLC vs. manager-managed LLC
Member-managed LLC: LLC members may decide how they want the day-to-day operations of their company managed. Most limited liability companies choose to be a member-managed LLC, whereby the members run all aspects of the business.
Manager-managed LLC: If members do not want to handle the LLC’s day-in, day-out operations, they can appoint a manager (or several managers) to take on those responsibilities. The LLC manager can be an LLC member or someone the company hires. In manager-managed LLCs, members still maintain control by voting on key issues and making strategic decisions.
Domestic LLC vs. foreign LLC
Domestic LLC: An LLC goes on record as a domestic LLC in the state where it files its formation documents — called “articles of organization” or “certificate of organization.” The state where the company is registered is considered its domicile (home state).
Foreign LLC: An LLC registered as a domestic LLC in one state may have to file as a foreign LLC in other states where it conducts business. This is called “foreign qualification” and is typically required when the business activity in the other state(s) fits the state’s nexus (physical or economic) criteria.
Professional limited liability company
The PLLC is a type of limited liability company that only certain types of professional license holders (e.g., attorneys, accountants, engineers, physicians) may form. Not all states offer this business structure, so it’s not an option for professionals everywhere.
A PLLC is by default treated as a pass-through tax entity. However, like the standard LLC structure, a PLLC may elect for S corporation tax status if the company and its owners meet the IRS’s eligibility criteria.
Series LLC
A Series LLC (SLLC) is a form of limited liability company that has a parent (umbrella) LLC with other LLCs (series) set up beneath it. Each series has its own income, debts, obligations and rights. Typically, each series within an SLLC is taxed separately.
6 considerations for choosing the right LLC business structure
Your individual clients will likely have differing circumstances, needs and goals. So, the type of LLC ideal for one client may not be the same as the preferable LLC structure for another client. Here’s a list of questions that can help your clients begin to think about the LLC types that might fit their needs. For specific tax and legal insight regarding which LLC will serve their best interests, they should consult with qualified professionals licensed to offer that expert advice.
Consideration #1: Is this the first time they’re setting up the LLC?
A brand new LLC (not registered in any other state) will be considered a domestic LLC in the state where its owners file the company’s articles of organization. The company must abide by all that state’s rules and regulations for domestic LLCs.
Consideration #2: How many people will own the LLC?
If one person (or a married couple) owns the company, the limited liability company is a single-member LLC. If the company has two or more (unmarried) owners, the limited liability company will be a multi-member LLC.
Consideration #3: How involved will the business owners be in everyday operations and management of the company?
Do the LLC members wish to be “hands on” in handling day-to-day business activities and decisions? If they all want to be immersed in everyday business operations, choosing a member-managed structure might serve them well.
Or do the members prefer to delegate daily operational responsibilities to someone else? If so, they might opt to run the business as a manager-managed LLC.
Consideration #4: Are the LLC members licensed professionals?
In some states, certain industry professionals may have to form a professional limited liability company. PLLCs may have one or more members. Typically, all of a PLLC’s members must be licensed in the same industry. Most states recognize the PLLC structure. However, a few states do not offer the option at all — or only provide it to professionals in specific industries.
Commonly, the following professions are examples of those eligible (or required) to form a PLLC:
- Accountants;
- Architects;
- Attorneys;
- Chiropractors;
- Dentists;
- Engineers (e.g., civil, electrical, mechanical);
- Medical physicians;
- Ophthalmologists and optometrists; and,
- Psychologists and psychiatrists.
Consideration #5: Will the LLC be used for multiple opportunities under one main business?
The series LLC structure has become a popular choice for real estate investors who own multiple properties and want a few levels of liability protection. When formed and managed correctly, an SLLC protects:
- The owner's personal assets;
- The parent LLC’s assets; and,
- Each individual series from the debts and liabilities of any individual series within the SLLC.
Suppose a tenant or guest were to sue after they slipped and fell at a rental property owned by an investor with a series LLC. Let’s say that SLLC comprises a parent LLC with five series (each its own LLC) beneath it. The series LLC owner, the parent LLC and the other LLCs in the series would not be liable for the legal claims against that one property.
Similar scenarios could occur in other industries, too, such as financial investment firms, restaurant chains, retail stores, etc.
The legal and tax implications of forming an SLLC can become complicated, so it’s important for business owners to have a knowledgeable attorney and accounting professional’s guidance in setting it up correctly.
Consideration #6: Does the business owner aspire to expand into other states?
If an LLC registered in one state will expand its operations into another state, it must “foreign qualify” in the new state. Foreign qualification authorizes the existing entity to conduct business in the state where it’s extending operations. Foreign qualification (filing as a foreign LLC) isn’t necessarily required for LLCs simply selling products to customers in other states. Most states require foreign qualification when a company meets their criteria for establishing a physical presence (a retail store, warehouse, or office) or
Empower your clients to make an informed decision
As clients explore the benefits of forming an LLC, the above considerations can help them understand which LLC type may benefit them most. To further home in on the right LLC, they will need professional guidance from someone legally authorized to provide tax and legal advice. Give them the direction and insight you’re licensed to offer, and refer them to other trustworthy, licensed resources to assist them in the areas outside your expertise.
