An LLC—or limited liability company—is a type of business structure that’s becoming increasingly popular among ambitious entrepreneurs or budding business owners looking to take charge of their professional destiny.
But what is an LLC, exactly? Is an LLC right for you and your commercial objectives? And which LLC types might suit your needs best?
Find out all you need to know about LLC types here in this essential guide.
What is an LLC?
Known as a “hybrid” type of business structure, an LLC offers business owners certain protections or features usually afforded to a corporate organization alongside the streamlined simplicity you usually get as a sole proprietor.
There are different types of LLC available to entrepreneurs and business owners. But, the key concept that makes an LLC so attractive is its mix of plus points, including:
- Limited liability in terms of debts and obligations
- Pass-through taxation opportunities to avoid being ‘double-taxed’
- More control and flexibility in terms of strategy and daily operations
- Simpler structures that are easy to set up
The 9 types of LLCs explained
Now that you’re up to speed with the key features and benefits of LLCs, let’s explore the nine main LLC types in more detail.
1. Single member LLCs
A single-member LLC is where a single person (or a “solo-preneur”) owns and runs the business.
This LLC type offers limited liability protection, meaning the owner's personal assets are usually shielded from any potential business debts and liabilities.
What are the advantages of a single-member LLC?
- You can keep your personal assets separate from the business
- It boasts a simple tax system
- You can pass ownership onto other people
- You can add and approve new members with ease
What are the disadvantages of a single-member LLC?
- A heavier amount of paperwork compared to traditional sole proprietorship
- Regular forms to fill to prove you’re in compliance with state laws
- You have to actively keep your personal assets and finances from the business
Taxes for a single-member LLC
For tax purposes, the IRS sees a single-member LLC as a “disregarded entity,” also known as a “flow-through entity.” This means you're separate from the LLC, and you must pay any taxes owed by your company as part of your income tax return, much like a sole-proprietorship.
States where you can register a single-member LLC
Every state in the US permits single-member LLC types.
Who should consider using a single-member LLC?
This type of LLC is best for people looking to run the business themselves, largely as a solo-preneur. It’s most suitable for the likes of:
- Independent contractors
- Consultants or advisors
- Freelancing professionals or creatives
2. Multi-member LLC
As you may have guessed, a multi-member LLC is a situation where two or more people own and run a business together (a partnership of sorts).
This LLC type offers limited liability protection, shielding the owners' personal assets or finances from any debts and liabilities linked to the business. This structure is popular with people looking to combine their resources and expertise while maintaining some personal liability protection.
What are the advantages of a multi-member LLC?
- You can add or work with an unlimited number of members
- Members can be from the US or overseas
- You can choose a S or C corps taxation situation
- This seen as a pass-through entity
What are the disadvantages of a single-member LLC?
- You need to register with your state
- The more members you add, the more paperwork you’ll have to tackle
- Owners can only become official LLC employees once they've change their tax status
Taxes for a multi-member LLC
Typically, multi-member LLC owners pay taxes in the same way as partnerships.
So, members are required to pay taxes on their share of the company's profits and losses by filling out a Schedule E (form 1040) and attaching it to their tax return.
States where you can register a multi-member LLC
It’s possible to form and register for this type of LLC in all 50 US states.
Who should consider using a multi-member LLC?
All things considered, a multi-member LLC is best suited to these types of business:
- Businesses that benefit from strong partnerships
- Family-run ventures
- Groups of friends with a mix of skillsets looking to launch a company
3. Professional LLC
This most popular of LLC types is designed to suit licensed professionals like accountants, doctors, and legal professionals.
This LLC type also provides liability protection and has features that suit people who are looking to actively practice in their professional field while having control over their core business strategies and operations.
What are the advantages of a professional LLC?
- This type of LLC is eligible for pass-through taxation
- Professional LLC status can enhance your credibility and build trust
- You get a decent level of control over your management structure and ownership
What are the disadvantages of a professional LLC?
- Membership is typically restricted to members who are licensed in the same field
- Setting up a PLLC can be complex and requires a lot of paperwork
- Licensing restrictions and complexities can create the potential for conflict among members
Taxes for a professional LLC
Professional LLCs often operate as pass-through entities, so they don't pay income tax directly. Instead, profits and losses pass through to the members, who declare them on their individual tax returns. Essentially, PLLC members are seen as self-employed and must pay self-employment taxes.
States where you can register a professional LLC
You can apply for this LLC type in all 50 states. But requirements may differ slightly in each state.
Who should consider using a professional LLC?
As mentioned, these LLC types are best for licensed professionals in fields like law, medicine, real estate or financial consultancy, and accountancy.
4. Series LLC
With these types of limited liability types, you can create multiple divisions within a single business entity.
Each division, known as a "series," operates independently, with its own set of assets, liabilities, and members. This structure offers asset protection for each separate series, so that issues with one series won't affect the others.
What are the advantages of a series LLC?
- You only need to pay for the registration of the parent (or umbrella) LLC, and you can set up multiple series within it
- As you’re only officially registering one parent LCC, you save on extra paperwork, administrative costs, and admin-based logistics
- All assets within this type of LLC are separate and protected from one another. They’re also a little more cost-effective to set up than some similar types of businesses with subsidiaries
What are the disadvantages of a series LLC?
- As series LLCs are fairly new compared to other types of business LLC, there are some grey areas around rules and legalities
- The initial set up costs are slightly higher than some other types of LLC
- Each series LLC requires its own business account and accounting responsibilities
Taxes for a series LLC
The IRS is still fine-tuning tax procedures for series LLCs. But all states tax them in a slightly different way, and you need to tax each series separately.
States where you can register a series LLC
At present, California is the only state that doesn’t accept the formation of series LLCs. But it does recognize series LLCs from other states.
Who should consider using a series LLC?
While its in its infancy and has a few inevitable teething problems, a series LLC is effective for plenty of business types, including:
- Real estate investors
- Holding companies
- Venture capital funds or hedge fund businesses
- Companies juggling multiple projects or divisions
5. L3C (Low-Profit Limited Liability Company)
An L3C (Low-Profit Limited Liability Company) is a type of business model designed to merge social impact with financial gain. Basically, it's a little like a hybrid between a non-profit and a for-profit organization.
L3Cs lean on a strong social mission, like environmental sustainability or community development, while generating profits. This model allows them to secure investments and operate with more efficiency than traditional non-profits.
What are the advantages of an L3C?
- You can do something good and meaningful and make profits in a way that’s fair, honest, and legitimate
- You can create subsidiary L3Cs to explore profitable ventures that further support your mission or cause
What are the disadvantages of an L3C?
- Investors can run the risk of losing their money without reaping any tax rewards
- With little control of how L3Cs handle their money, this limited liability type can put investors off
Taxes for an L3C
Here are the rules in a nutshell: If your L3C has more than one member, it’s taxed as a partnership by default. If you’re a single-member L3C, you’re classed as a pass-through entity and file taxes on your return.
States where you can register an L3C
L3Cs are accepted in all 50 US states. But there are restrictions you should explore if you’re setting up an L3C in:
| Kansas | Louisiana | Vermont |
| Maine | Michigan | Minnesota |
| Rhode Island | Missouri | Kentucky |
| Wyoming | North Dakota | Louisiana |
| Illinois | Utah | Tennessee |
| The federal jurisdictions of the Oglala Sioux Tribe and the Crow Indian Nation of Montana |
Who should consider using a L3C?
As we said, an L3C can be ideal for businesses with a strong social mission—those who want to make a profit and do something for the greater good. These include:
- Social entrepreneurs
- Impact investors
- Organizations with a strong sense of philanthropy or social consciousness
6. Domestic LLC
Essentially, a domestic LLC offers all of the features and key benefits of a standard LLC structure, except its register and set up for operation in the state in which it was formed.
What are the advantages of a domestic LLC?
- You can choose to register and operate in a state that has legislations and rules that fit with your business the best
- You have a good level of control over how your business is managed
What are the disadvantages of a domestic LLC?
- This type of LLC can be more restrictive than some of the others
- You have to be very well-versed in the restrictions or laws related to your state of choice
Taxes for a domestic LLC
You’ll be taxed based on your type of domestic LLC as well as the specific legislations of your chosen state.
States where you can register a domestic LLC
You can register for a domestic LLC in all 50 US states.
Who should consider using a domestic LLC?
A wide range of businesses can benefit from a domestic LLC, including freelancers, consultants, and US-based small business owners mainly operating from one central location.
7. Foreign LLC
Unlike a domestic LLC, a foreign limited liability company that operates in a different state from the one where it was originally formed. Again, this increasingly popular of LLC types offers the core benefits of control and liability protection.
What are the advantages of a foreign LLC?
- Foreign LLCs offer the freedom and choice to operate in a state that has business laws that you can use to your business-boosting advantage
- You can expand your business more seamlessly with a foreign LLC than some other types of limited liability company
What are the disadvantages of a foreign LLC?
- Each state has its own set of stringent compliance laws that you’ll need to navigate
- Some states charge higher annual fees for foreign LLCs
Taxes for a foreign LLC
Like domestic LLCs, you’ll typically get taxed based on your type of foreign LLC in addition to the specific legislations of the states where you choose to operate.
States where you can register a foreign LLC
It’s possible to register for a foreign LLC in all 50 US states.
Who should consider using a foreign LLC?
A foreign LLC works for the same styles of business as a domestic LLC. But it’s specifically geared towards business with ambitious growth plans or looking to expand into new markets.
8. Nonprofit LLC
A nonprofit LLC is a one of the main types of limited liability company (in addition to L3Cs) that is designed for organizations who exist to fulfil a charitable mission that doesn’t directly involve making profits for its members. It combines the structure of a traditional nonprofit, coupled with the protections and flexibility of an LLC.
What are the advantages of a Nonprofit LLC?
- Nonprofit LLCs are generally simpler to set up than more traditional forms of not-for-profit ventures
- You can benefit from the core features of an LLC while still accessing grants and funding
- You are eligible for certain types of tax exemption.
What are the disadvantages of a nonprofit LLC?
- You will have to navigate a complex set of rules and regulations
- You may face some public scrutiny by operating as a nonprofit LLC
- If you fail to comply with the IRS, you can lose your tax exemption status
Taxes for a nonprofit LLC
As a nonprofit LLC, you can benefit from tax-exempt status under Section 501(c)(3) of the Internal Revenue Code. This means your organization is exempt from federal income tax and can even reap the rewards of tax-deductible donations.
But as it can be a complex situation to navigate, we recommend talking to a professional advisor to ensure your tax affairs are compliant and work for you.
States where you can register a nonprofit LLC
You can register as a nonprofit LLC in all 50 US states. But, it’s worth noting that certain legislations and fees can vary from state to state. The states of Delaware, Wyoming, and Nevada are generally known to be the most amenable states for nonprofit LLCs.
Who should consider using a nonprofit LLC?
This model will suit any nonprofit organization who is looking to reap the added benefits of an LLC. These include:
- Modern charities or foundations
- Community organizations
- Educational or religious organizations
9. Restricted LLC
This unique LLC type is a business model in which you can’t be taxed or make profits until 10 years after the company’s formation.
This is used for very specific purposes which mainly revolve around transferring assets from one party to another with the added benefits of initial tax exemption and liability protection.
What are the advantages of a restricted LLC?
- It’s a savvy and effective way of safely transferring assets for future investment in the future
- You can customize a restricted LLC to meet your specific needs
What are the disadvantages of a restricted LLC?
- It’s incredibly limited in scope and should only be used for very specific reasons
- This type of LLC can be incredibly complex to set up and maintain
Taxes for a restricted LLC
The taxation of restricted LLCs is generally dictated by its membership percentages and ownership structure as well as the number of business activities conducted within it. Working with a professional advisor is a good idea when dealing with restricted LLC taxation.
States where you can register a restricted LLC
Right now, restricted LLCs are only available in the State of Nevada.
Who should consider using a restricted LLC?
There are fairly niche business circumstances that lend themselves towards restricted LLCs. These include:
- Estate planning
- Asset protection
- Succession planning
How to choose an LLC type for your business purpose
Once you learn how to start an LLC, the type you choose will depend largely on your personal business circumstances, including your profession, industry, goals, growth plans, and whether you’re looking to involve two or more members.
Before you consider different types of LLC, you should know the common features or benefits of limited liability company models.
To help you make the very best decision for your business needs, here’s a checklist of questions you should ask yourself:
| To help you make the very best decision for your business needs, here’s a checklist of questions you should ask yourself: |
|---|
| Are you a sole proprietor or looking to enter a partnership? |
| What are your limitations in terms of budget? |
| Can your business benefit from a flexible taxation model? |
| Do you have investors or a large ownership group? |
| Is scaling steadily more your speed or are you looking to grow quickly? |
| Does your niche, trade or profession lend itself more to other LLC types? |
| Are you looking to trade domestically, overseas, or both? |
| Is your business mission philanthropic or does it have a strong social mission? |
By asking yourself these key questions and working your way back through our definitive LLC type list, you’ll be able to make an informed decision on which limited liability route to explore.
Ultimately, you should make a decision based on this well-rounded mix of criteria. Always get more than one perspective when committing to an LLC—seeking a little extra expert consultancy won’t hurt either if you’re unsure at which road to take.
Remember, LLCs are all about you being able to take control of how you run your business while benefiting from a certain level of asset protection.
So, take charge of your decision from the very start, weigh up different types of limited liability company carefully, and you’ll reach a decision that will allow your business to thrive,
FAQs
What is the best type of LLC to have?
There are nine definitive types of LLC you can register for or explore. While each LLC offers a certain level of control when it comes to ownership and operation, it’s important to consider your specific needs when setting up a limited liability company. The best type of LLC will depend on your industry, profession, and individual circumstances.
What type of LLC is most common?
Single-member and domestic (or domestic, single-member) LLCs are the most common form of limited liability company. But while this is the case, each LLC offers its own set of benefits and features that may suit best based on your specific business type, model, and needs.
How should I categorize my LLC?
To categorize your LLC effectively, you should do your research, Consider your trade, location, industry, and whether you’re looking to proceed solo or in a partnership. Once you’ve considered these elements, seeking professional advice and guidance is advisable to ensure you make the best possible decision.
What are the three main disadvantages of an LLC?
While LLCs can offer a treasure trove of benefits, there are also some disadvantages to consider.
For instance, unlike S-corps and C-corps, LLCs are subject to full self-employment tax, which is the employer portion of Social Security and Medicare taxes that are usually covered by an employer when you are a W-2 employee.
Plus, limited liability protection is not completely watertight, and while LLCs are fairly simple to form, register, and maintain, they do command more requirements than a sole proprietorship or partnership situations.
Summary
There is no best industry category to choose to form an LLC and this form of model can benefit business owners of all shapes and sizes.
By doing your research, understanding your goals, and knowing the key features of each type of limited liability company, you will arrive at an informed decision that will put you in the commercial driver’s seat.
Work your way back through this guide, take your time, and business domination will be yours for the taking.For more business insights and information, explore our ever-expanding library of guides, how-tos, and content created especially for ambitious SMBs and solo-preneurs just like you.
