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There are many different types of LLCs you can structure your business as, and each one provides its own distinct benefits and drawbacks.
In this article, we’ll discuss the 9 different types of LLC and help you explore the differences between them and how they can affect your enterprise, including:
- How each type of LLC functions
- What different LLCs mean for tax purposes
- How to tell which LLC type is right for your business.
Let’s get straight into it!
The 9 different types of LLCs
- Single-member LLC
- Multi-member LLC
- Domestic LLC
- Foreign LLC
- Series LLC
- Low-profit LLC
- Anonymous LLC
- Restricted LLC
- Professional LLC
1. Single-member LLC
As the name suggests, a single-member LLC only has one member. This could be another business or an individual, but in all cases, only one entity may be a member.
A single-member LLC is normally treated by the IRS as a disregarded entity, which means that the individual member is taxed on the profits of their LLC.
Single-member LLCs are allowed in all 50 states and are a popular choice for those looking to separate their business and personal assets (but not intending to expand into a larger business structure).
2. Multi-member LLC
A multi-member LLC is perhaps the most standard and quintessential LLC structure in the United States.
It is an LLC made up of multiple members, businesses, or individuals, who are each owners of the business.
Multi-member LLCs still have limited liability extending to each of the members, and as a pass-through entity, the profits and losses of a multi-member LLC are passed on to its members.
Members then pay the relevant taxes as part of their personal returns.
A multi-member LLC is by default treated as a partnership when determining its taxation rate unless the members expressly request otherwise.
A multi-member LLC is a common form of LLC for those who might go into business with friends or family and want to protect their personal assets from the losses and liabilities of their business.
You can learn more about the basics of LLC tax returns on the IRS website here.
Related reading: Member-managed LLC vs. manager-managed LLC
3. Domestic LLC
A domestic LLC is an LLC that trades and operates only in the state in which it was established.
In a broad sense, LLCs file articles of organization in any given state and then are able to register in other states if they wish to do business there.
A domestic LLC never files for registration in other states because it operates solely in its home state.
A domestic LLC is not technically a type of LLC that you register as when you establish your business.
It is a term that describes a type of LLC that operates only in its home state, and an LLC ceases to be domestic once it registers to operate outside of its home state.
Apart from trusts, banks, and other types of organizations that are legally unable to register as any type of LLC, any LLC can be a domestic LLC by virtue of only ever operating domestically.
4. Foreign LLC
The inverse of a domestic LLC is a foreign LLC. When an LLC registers and does business outside of its home state, it automatically becomes a foreign LLC.
Foreign LLC status, like domestic LLC status, is not something a business chooses to file as.
Whenever a business from another state registers to trade in a state in which it did not file its articles of organization, it automatically files as a foreign LLC.
There are many severe penalties for trading in a foreign state without the appropriate registration, up to and including heavy fines and the dissolution of the LLC.
There is no way around it: if you plan to trade outside your home state, you must file as a foreign LLC.
5. Series LLC
A series LLC is an arrangement in which a parent LLC owns one or more “series” LLCs beneath it.
This means that each of the operating LLCs in the series are owned by the same members, but are distinct from one another in their assets, personnel, and liabilities.
This LLC structure is relatively new, having first appeared in Delaware in 1996, but many states have adopted regulations to allow series LLCs to be formed.
You might run a series LLC when you have multiple business locations in the same chain, but each one conducts business as an individual entity.
Something like a chain of mechanic shops that are all owned by the same parent company, but are not part of a franchised brand.
The benefit of this is that should one of the shops become unprofitable or take on greater liabilities such as rental debt or staffing issues, the other LLCs in the series cannot be pursued for repayment by creditors.
A series LLC can be a more complex arrangement, so it is best to seek legal advice in your state to determine if your state allows series LLCs and what requirements you need to meet to form one.
6. Low-Profit LLC
A low-profit LLC is commonly referred to as an L3C. A low-profit LLC is still a for-profit entity and does earn income for its members, but it is also required to meet other key requirements.
A low-profit LLC must have been formed primarily for the purposes of furthering a charitable or educational goal.
The requirements for what constitutes furthering a charitable or educational goal are outlined in Sec. 170(c)(2)(b) of the Internal Revenue Code.
Further, an L3C cannot have as its primary purpose the generation of profit, but it can still pay employees and members from its profits.
An L3C also cannot have as its primary goal any particular legislative or political outcomes.
As is probably clear, an L3C is most likely to be formed by a charity in any given state to support the goals of that charity.
7. Anonymous LLC
An anonymous LLC is another type of LLC, like a domestic or foreign LLC, that is defined by particular factors relating to its structure and management and not a particular type of registration.
An anonymous LLC is simply an LLC in which the names and contact information of its members are not publicly available.
Not all states allow anonymous LLCs, and the state government must still have the requisite contact information of the members, but where they are allowed, anonymous LLCs operate exactly the same as any other LLC with this one key distinction.
Because LLCs require contact information, anonymous LLCs will nominate a registered agent for all communications.
8. Restricted LLC
Restricted LLCs are only available in the state of Nevada and are used for the transfer of assets.
Because restricted LLCs are used for estate planning, they are rather different from an LLC used to conduct business.
Restricted LLCs are barred from passing profits to members for a ten-year period, which means that assets held by the business continue to generate interest but are untaxed and undistributed.
Once the ten-year period has passed and the distribution of profits or assets is allowed, the estate or gift tax paid by the members is lower than in other states because Nevada’s restricted LLC laws include a series of value discounts that lower the taxable value of the LLC.
9. Professional LLC
A professional LLC (PLLC) is an organization set up by licensed or chartered professionals.
Doctors, lawyers, dentists, or any other professionally licensed occupation can establish a PLLC, but not every state allows for their creation so be sure to check local regulations.
The functioning of a PLLC is the same as any regular LLC, but the state needs to verify the professional licensing of each of the members.
PLLCs do not shield members from malpractice claims against them as individuals, so it is most important that members have their own malpractice insurance.
Related reading: PLLC vs. LLC
Which type of LLC is right for me?
As you can see, the sheer number of LLCs possible can be overwhelming at first glance.
In reality, some LLC types (such as PLLCs or 3LCs) won’t apply to you because of your needs, and others are simply distinctions between different locations like whether your LLC is domestic or foreign.
The more you know about your local business landscape and regulations and the more you know about your business needs, the easier it will be to choose the appropriate LLC type.
You can also engage the services of a lawyer to help clear things up for you and guide you through the process.
What is an LLC?
An LLC is a business structure that separates its members’ personal assets from business assets and as such, provides limited liability protection.
That means that the individual members are not able to be pursued by the LLC’s creditors.
What type of LLC is most common?
Multi-member and single-member LLCs are the most common specific types of LLCs.
How much does an LLC cost?
The cost of registering an LLC varies from state to state, plus optional legal fees and tax rates differ between states as well.