A limited liability company (LLC) is a form of business structure that combines elements of the typical corporation and partnership structures. By forming an LLC, you can create a legal entity that provides limited liability to its owners.
There are several different types of LLCs, depending on how you want to structure your business.
Single-Member LLC or Multi-Member LLC
Most of the time, you can choose which kind of LLC you want to form. But, state law will dictate whether your new LLC must be a single- or multi-member company. For example, you can form a single-member LLC in all states except in Massachusetts.
As its name suggests, a single-member LLC is an LLC with only one owner — also known as a member. The Internal Revenue Service (IRS) will always treat a single-member LLC as a “pass-through entity” for tax purposes. This means that instead of having to pay the 39.1 percent corporate tax, you can include the profits of your LLC on your personal income tax return.
If your LLC has at least two members that aren’t married, then the IRS will consider it a multi-member LLC and treat it as a “pass-through entity” for tax purposes. Each member will claim his or her share of the LLC’s profits on their respective personal tax returns.
Converting a single-member LLC to a multi-member LLC occurs when the ownership stake of the company is divided among additional owners (members). The LLC organizational structure is a common choice for small businesses because of its flexible management structure and ease of formation.
Member-Managed LLC or Manager-Managed LLC
You’ll also need to choose if you want your new company to have a member-managed or manager-managed structure. By default, an LLC is member-managed. But, it may prove beneficial for you to designate specific managers to oversee daily business operations.
Member-managed LLCs often have a small number of LLC members who play an active role in the operations of the company. Each member has a say in the daily operations and business decisions.
Manager-managed LLCs typically have a large number of LLC members. Those members allocate administrative power to one or more specific managers to handle the company’s daily business affairs.
A Series LLC allows you to create as many “series” as you want. These “series” operate directly under your original LLC, but receive separate treatment for liability purposes. Yet, when it comes to paying taxes, things can get a little tricky with this type of LLC.
Because the Series LLC is fairly new, most states allow you to choose the way it’s taxed. This may, however, change from state to state as new laws get passed.
In Delaware, for example, you’d only pay the $300 franchise tax one time no matter how many “series” you have in your Series LLC.
Delaware was the first state to offer Series LLC formation. As of 2021, the Series LLC type is only available in:
A professional limited liability company (PLLC) is a business entity designed for licensed professionals, such as lawyers, doctors, architects, engineers, accountants, and chiropractors.
While many businesses choose to form an LLC because of the tax, limited liability, and other benefits, some states don’t allow professionals whose occupation requires a license to own an LLC. In these states, licensed professionals who want the benefits of an LLC must form a PLLC instead.
To form a PLLC, you usually must meet the following requirements:
- The state licensing board for your profession must approve your Articles of Organization or similar organizational document.
- You must adhere to other requirements, which will differ based on your state and particular profession.
Because securing licensing board approval is an extra step in the LLC formation process, it sometimes takes longer to form a PLLC than an LLC.
Restricted LLCs can only be formed in Nevada. This type of LLC is used solely for estate planning purposes, such as to gift property from one family member to another. A restricted LLC can’t make any distributions to members for 10 years after its formation, which can be seen as a drawback of this type of company. Nevada state law also limits the amount a restricted LLC can distribute.
Because the assets of a restricted LLC can’t be liquidated, they can’t be taxed — which is the main benefit of this type of LLC. To become a restricted LLC, the company must make this election in its Articles of Organization.
A low-profit limited liability company (L3C) is formed by filing Articles of Organization (or whatever the formation document is called by the state) in one of the states that authorize L3Cs. Vermont was the first state to provide for L3Cs in 2008. The laws of Illinois, Maine, Michigan, Louisiana, Rhode Island, Utah, and Wyoming also provide for L3Cs.
An L3C is subject to the same provisions of a state’s LLC laws as any other LLC. This means it must appoint and maintain a registered agent and create an Operating Agreement. In addition, if a state requires its LLCs to file an annual report and pay an annual fee, an L3C must do so as well.
The L3C designation must be indicated in the company’s Articles of Organization, and the company name must include the words “Low-Profit Limited Liability Company” or the abbreviation “L3C.”
LLCs That Aren’t Actually an LLC Business Entity
Some LLCs aren’t actual types of business entities, but LLCs formed for different reasons. The LLC structure, however, doesn’t change.
Anonymous LLCs are LLCs that don’t require the owners/members or managers to provide their identities. Thus, the name of the company used is “anonymous LLC.” An anonymous LLC also may be referred to as a “confidential LLC” or a “private LLC.”
An anonymous LLC receives the same benefits as those provided to a regular LLC. These benefits include tax advantages, flexibility, survivability, and limited liability protection.
But, registering as an anonymous LLC doesn’t guarantee complete anonymity from your bank or the IRS. It also doesn’t exclude the business from paying taxes. As an anonymous LLC, the business is still subject to lawsuits and, through a subpoena filed by an attorney, can be required to identify its owners.
LLCs as Corporations
If you decide to form an LLC to own and operate your small business, you have a couple of choices for how you want your LLC to be taxed. For federal income tax purposes, there’s no such thing as being taxed as an LLC. If you don’t want the IRS to treat your LLC as a “pass-through entity,” you can instead opt for your LLC to be taxed like a C corporation (C corp) or an S corporation (S corp).
In this scenario, the terms C corp and S corp are tax designations — NOT the business structure. This replaces the “pass-through entity” tax structure, but the company retains its LLC business structure.
If you elect to have the IRS treat your LLC as an S corp for tax purposes, you may have the opportunity to do some tax planning to minimize your business’s overall tax liability.
From a tax perspective, the IRS will treat your enterprise as an S corp. That means you’ll still benefit from passing your LLC’s income through to members’ personal tax returns to avoid double taxation. This is the same as if the IRS treated your LLC as a proprietorship or partnership.
An LLC taxed as a C corp may prove beneficial, depending on your particular business and how you’d like to gain capital for its operations. Your LLC won’t become a corporation, but you can choose to have it taxed as a corporation for certain reasons.
Owners of S corps face limits in the amount they may deduct for the following benefits, such as life insurance and medical insurance. C corp owners don’t have these same limitations.
If you want to save money, including the amount of taxes you pay, you can have your LLC taxed as a C corp (without all the legal complexities that come with operating as a corporation).
Types of LLC FAQ
How many different types of LLCs are there?
There are a number of LLC types from which to choose, depending on how you want to organize and manage your LLC. See above for more information.
What LLC type is the best for my business?
The type of LLC that’ll best suit your business will depend on your company’s goals and purpose.
How do I know what type of LLC I have?
When forming an LLC, you’ll know what type of LLC you have. You’ll assign this on your Articles of Organization (or Certificate of Formation). To form an LLC, see our How to Start an LLC page for more information.