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House Passes Bill Expanding Child Tax Credit and Business Breaks

The Different Types of LLCs

There are many different types of LLCs, but they can generally be categorized by their ownership structure, management structure, and tax treatment.  In this article we will describe the different types of LLCs,  starting with the basic and more common LLC structures to the more complex structures.

Types of LLCs

  • 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.  Activity for a single member LLC is reported on a taxpayer’s Schedule C as part of their individual return.  Schedule C businesses have the highest IRS audit rates among business entity types.
  • 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 constitute “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 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.
  • C Corporation LLC: A C corporation LLC is taxed as a corporation, meaning that the profits of the LLC are taxed at the corporate level and then taxed again when they are distributed to the members as dividends.
  • Low-profit LLC: A low-profit LLC (L3C) is a type of LLC that is formed for a social purpose, such as education or environmental protection. L3Cs have some of the same tax benefits as nonprofits, but they are not subject to the same restrictions.

The type of LLC that is best for you will depend on your individual circumstances and needs. If you are unsure of which type of LLC is right for you, it is a good idea to consult with an attorney.

The information presented here should not be construed as legal, tax, accounting, or valuation advice. No one should act on such information without appropriate professional advice and after ]a thorough examination of the particular situation.