11 types of LLCs for small business
A limited liability company (LLC) is a business structure that protects its owner's or owners' personal assets and retains the tax advantages of a partnership or sole proprietorship.
LLCs are easy to form and run, simplify taxes, and require fewer corporate formalities. These are the reasons why LLC is so popular among small businesses in the US. The Internal Revenue Service (IRS) highlights that in 2021 LLCs made up the majority of partnerships (71.7%), surpassing all other entity types.
This guide will cover different types of LLCs by size, management, and business structure. We will also describe their availability in different US states and tax implications.
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Learn moreTypes of LLCs by size
The two types of LLCs by the number of owners are
- Single-member limited liability company
- Multi-member limited liability company
Single-member LLC
As the name states, a single-member LLC consists of one owner. This structure offers simplicity similar to a sole proprietorship while providing the liability protection of an LLC.
For example, a freelance designer might choose a single-member LLC to protect personal assets from business-related issues.
Multi-member LLC
Multi-member LLCs have two or more owners. By default, the IRS treats multi-member LLCs as partnerships.
For instance, a family-owned restaurant with owners may choose a multi-member LLC entity for their small business. It allows profit sharing and joint decision-making while maintaining protection against business liabilities.
Also read. Complete guide to multi-member LLC taxation
Types of LLC by management type
The two types of LLCs by management type are
- Member-managed limited liability company
- Manager-managed limited liability company
Member-managed LLC
In a member-managed LLC, the owners actively participate in the company's daily operations and strategic business decisions. This model is similar to a partnership where each member has a say in the business.
For example, a tech startup whose owners are also product managers might choose this structure for hands-on management.
Manager-managed LLC
A manager-managed LLC is ideal for owners who prefer not to engage in routine operational activities. Instead, they appoint a member or hire a COO to handle the day-to-day business activities.
This structure better suits larger LLCs or those with passive investors.
Types of LLC by business structure
A LLC is a flexible business structure, with a wide range of different types to consider when setting up a business.
The most common LLC types by business structure are:
- Domestic LLC
- Foreign LLC
- Series LLC
- Low-Profit LLC (L3C)
- Anonymous LLC
- Restricted LLC
- PLLS (Professional LLC)
Domestic LLC
A domestic limited liability company is a business entity that operates within the state where it was formed.
For example, if an LLC is formed in California and runs its business in this state, it is a domestic California LLC.
As of 2021, the United States had more than 3.2 million domestic LLCs, making them the most popular type of LLC in the country.
Taxation. Profits and losses are reported on the owners' personal tax returns. A domestic LLC is subject to state tax laws, which differ from federal tax rules. This is why it's important to carefully study the state's tax regulations where you plan to operate.
Availability. All US states.
Foreign LLC
A foreign LLC means that a company operates in a state other than where it was formed.
For example, if your LLC is formed in New York, but you want to open a second branch in California, you may need to complete a foreign qualification in California.
Taxation. As with any other LLC, a foreign LLC is subject to federal income tax which is reported on owners' personal tax returns. Unless you are exempt from foreign qualifying, you will need to file state tax returns on income within each state where you do business.
Availability. All US states.
Series LLC
A series limited liability company consists of a master or “umbrella” LLC with one or more LLCs under it. These separate entities, sometimes also called series or cells, have their own operating agreement, assets, names, etc.
Taxation. The IRS treats a series LLC as a partnership by default. Only the master LLC needs to file a tax return, including all other cells within the series.
Availability. Limited – not all US states recognize series LLCs. States that allow series LLCs include Delaware, Illinois, Nevada, Texas, and others. Some states, like California, do not permit the formation of series LLCs but recognize those formed in other states.
Choose a series LLC to operate multiple LLCs as one entity. This will bring a higher level of liability protection for the LLC's members.
Low-profit LLC (L3C)
A low-profit LLC (L3C) combines the benefits of a traditional for-profit entity with the social benefits of a nonprofit organization. Such entities are created mainly for charitable or “bettering society” purposes, but can still earn some money.
Taxation. A low-profit LLC pays taxes similar to any other LLC. If your L3C has multiple members, it’s taxed as a partnership. If you’re a single-member low-profit LLC, you’re a pass-through entity for tax purposes.
Availability. Limited – not all US states recognize low-profit LLCs. You can form low-profit LLCs in several US states, including Illinois, Louisiana, Maine, Michigan, and others.
Anonymous LLC
An anonymous limited liability company prevents the public disclosure of the ownership information in the state where it is registered.
Taxation. An anonymous LLC has the same tax and management flexibility and limited liability features as a regular LLC.
Availability. Limited – not all US states recognize anonymous LLCs. These are the four states that allow forming an anonymous LLC: Delaware, Nevada, New Mexico, and Wyoming. Note that each of them has a different set of tax regulations.
Restricted LLC
A restricted limited liability company allows the transferring of assets like properties, businesses, or land to its owners.
Such a business structure has restrictions on when you can pay out the profits from the LLC. By default, the distribution of profits can not be made to its owners for at least ten years.
Taxation. Restricted LLC allows for its owners to pass on assets tax-free.
Availability. You can only form a restricted LLC in the state of Nevada.
PLLS
A professional LLC or PLLC is a business entity for licensed professionals such as doctors, attorneys, architects, or engineers. In some states, licensed professionals can not own an LLC, but they can form a PLLC instead.
Normally, a PLLC is a regular LLC but has additional formation, management, and reporting requirements that vary greatly from state to state.
Taxation. A PLLC has the same tax requirements as a regular LLC.
Availability. Limited and varies from state to state.
LLC tax classifications
A limited liability company can be taxed as a sole proprietorship, partnership, or corporation, each with different tax implications.
When filing taxes as a single-member LLC, your business income is taxed at personal rates. You report income and expenses using Schedule C, part of Form 1040.
Multi-member LLCs have a partnership status by default. You need to file Form 1065, and the members receive Schedule K-1 detailing profits or losses.
You can also opt for a C corporation or an S corporation with pass-through taxation. To learn more, read the TFX guide on LLC tax classifications.
Also read. How to file taxes for an LLC
FAQ
Limited liability companies (LLCs) can be classified based on size: single-member LLCs and multi-member LLCs. They can also be categorized by management structure: member-managed LLC and manager-managed LLC. Finally, we can group all limited liability companies based on business structure: domestic LLC, foreign LLC, series LLC, low-profit LLC (L3C), anonymous LLC, restricted LLC, and professional LLC (PLLC).
The most common LLC type in the US is a domestic LLC. As of 2021, there were over 3.2 million domestic LLCs.
The difference between a single-member and multi-member LLC lies in the number of owners: single-member LLCs have one owner, while multi-member LLCs have multiple owners.
In business, LLC stands for Limited Liability Company.
The default tax status for a single-member LLC is a sole proprietorship, while a multi-member LLC defaults to partnership status for tax purposes.
Disclaimer: This article is for informational purposes only and does not constitute legal or tax advice. Always consult with a tax professional regarding your specific case.
Susan Turcotte, a seasoned CPA with over 45 years of accounting experience, holds a Bachelor's in Accounting and a Master's in Taxation from Bryant College. See more
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