Just as there are flavors of ice cream, different varieties of the LLC business structure exist, too. The ideal option for a company may depend on a business’s industry, type of commercial activities, number of owners, and even an owners’ professional credentials.
On the CorpNet website, we offer a tool to help entrepreneurs zero in on the right business entity for them. In this article, I’ll describe some general scenarios and the limited liability company structure versions that might be most appealing in those situations.
Keep in mind that choosing a business entity type requires consideration of administrative requirements along with legal and tax ramifications. While I will provide food for thought here for informational purposes, it’s wise for entrepreneurs to seek the professional expertise of their attorney and accountant or tax advisor when deciding on which LLC or other business structure will serve them best.
Review the Different Types of LLCs
Before I get into the different situations and the LLC types that could be most advantageous, let’s do a quick review of typical LLC versions available to business owners. Note that some of them overlap a bit. In all instances, the LLC structure provides legal separation between business owners (called “members”) and their companies. That allows members to have some peace of mind that they personally won’t be liable for legal claims against the business under most circumstances. By default, LLCs and their owners are considered the same tax-paying entity, with profits and losses flowing through to the members’ personal tax returns. However, LLCs provide flexibility in how they’re treated for federal (and sometimes state) income tax purposes. If eligible according to the IRS’s criteria, they may elect for S Corporation tax treatment.
Please note that not all states recognize all types of LLCs, so entrepreneurs must review their state’s options.
- Single Member LLC – If a company will have just one owner (or a married couple as the owner, it is considered a single-member LLC.
- Multi-Member LLC – If an LLC will have more than one member, it is considered a multi-member LLC.
- Member Managed LLC – When owners run the day-in, day-out operations of the business, the LLC is member-managed. Most LLCs use this structure.
- Manager-Managed LLC – When LLC members want to appoint a manager (who could be someone that the company hires or one of the members) to handle daily operations, the LLC is manager-managed.
- Domestic LLC – When an LLC has registered its formation documents (Articles of Organization) in a state, it goes on record as a domestic LLC there. That state is the company’s domicile (a.k.a. home state).
- Foreign LLC – If an LLC is registered as a domestic LLC in one state and is conducting business in another state (physical presence or economic nexus), it must usually file as a foreign LLC in the additional state(s).
- PLLC – A professional limited liability company differs from the standard LLC in that only professional license holders (physician, attorney, accountant, etc.) may register the company. Like a regular LLC, a PLLC may elect to be treated as an S Corporation for tax purposes. Which can help minimize the self-employment tax burden on its members.
- Series LLC – Series LLCs are business entities (available in some states but not all) that have a parent (umbrella) LLC and other LLCs (“series”) beneath it with their own debts, obligations, and rights. Usually, individual series in the series LLC are taxed separately.
What to Consider When Choosing an LLC
1. How Many People Will Own My Company?
A single-member LLC is the structure used by a single owner or a married couple who will own the company. If separate individuals own the company, the LLC must be a multi-member limited liability company.
In either case, the company is a separate legal entity (disregarded entity) from its owners. Therefore, unless an owner is negligent or does something fraudulent or unlawful, the individual will likely not be personally responsible for legal claims or debts against the business.
From an income tax perspective, single-member LLCs are treated the same as a sole proprietorship, and multi-member LLCs are treated as a general partnership. Tax obligations flow through to the owners’ personal tax returns.
2. Will the Members Be Involved in Everyday Operations?
Business owners must consider whether they will be in the thick of managing day-to-day business decisions and activities or if they want to be more “hands-off.” If they intend to be intimately involved with business operations, they will likely choose to be member-managed. If they would rather appoint one member or hire someone else to handle everyday business responsibilities, they might opt to be manager-managed.
3. Am I Setting Up an LLC for the Very First Time?
A brand new LLC that does not exist anywhere else is considered a domestic LLC in the state where its formation paperwork gets filed. By filing Articles of Organization, the LLC establishes the state as its home state.
4. Do I Want to Expand into Another State?
When business owners have formed an LLC in one state and want to expand it into another state, they have the option of “foreign qualifying” in the new state. Foreign qualification is the process for getting approval to conduct business under their existing entity in the state where they want to extend their operations. Foreign qualification is required if a company will have a physical presence in the state or economic nexus (reaching a certain income threshold in a state).
5. Are the LLC Members Licensed Professionals?
If the members of the LLC are licensed professionals, they may wish (or be required) to form a professional liability company.
Examples of Professions that Form Professional LLCs
- Attorneys and law firms
- Accountants and CPAs
- Social workers
- Real estate agents
A PLLC may have one or multiple members. Most, but not all, states have a PLLC option for business owners. In the states where PLLCs exist, most require that all members of a PLLC are licensed or certified in the same field.
States That Recognize the PLLC Structure
- District of Columbia
- New Hampshire
- New York
- North Carolina
- North Dakota
- South Dakota
- West Virginia.
As with regular LLCs, PLLCs protect their owners from personal liability related to the business’s legal judgments or debt. Members’ personal liability is limited to their investment in the company. Although a customer or patient might sue one of the individual owners for negligence or malpractice, the other owners are not held liable for that owner’s failure or malpractice.
PLLCs are taxed as pass-through entities and have the option to elect S Corp tax treatment if they meet the IRS eligibility requirements.
6. Am I Setting Up the LLC for Multiple Opportunities?
When correctly formed and operated, a series LLC provides limited liability protection between the owner and LLC and between the parent LLC and each of the series (baby LLCs) beneath it. The structure also delivers liability protection between the individual series that are part of the parent entity.
Series LLCs are a popular option for real estate investors, especially those who own rental properties. One reason is that if a tenant or guest were to sue because they slipped and fell at one property, the other rental properties (established as series) and the parent LLC would not be liable for the legal claims against that one location. Another example of a business scenario that might benefit from the series LLC is the restaurant industry. Suppose an entrepreneur wants to form an LLC and operate independent restaurants under that company. If the company is set up as a series LLC and someone were to sue one of the restaurants, the other individual restaurants’ (series) and the parent LLC’s assets are protected.
Currently, the states that offer series LLC formation include:
- District of Columbia
- North Dakota
- South Dakota
States rules, tax implications, and liability protection details vary, so business owners must do their due diligence when considering this option.
How to Start an LLC
Registering an LLC involves filing Articles of Organization (sometimes called a Certificate of Organization) with the state government’s agency (usually the Secretary of State office) that oversees business activity. Regardless of whether an LLC is single-member or multi-member, member-managed or manager-managed, a PLLC or a series LLC, it’s essential to have an operating agreement in place. An LLC operating agreement officially documents members’ and managers’ roles and responsibilities, how profits will be distributed, dispute resolution procedures, and other essential details.
Other tasks involved in forming an LLC:
- Choose a business name
- Apply for an EIN (Federal Tax ID Number)
- Designate a registered agent
- Open a business bank account
- Apply for licenses and permits (as required by the federal, state, county, and local governments)
- Identify ongoing business compliance responsibilities
More LLC Resources
As you can see, there’s much to consider when choosing which LLC is right for your business. I’ve listed some additional articles that can help people understand the nuances of the different types of LLCs. As I mentioned earlier, getting professional guidance from licensed attorneys and tax professionals is imperative for weighing all the pros and cons.
- Single-Member Vs. Multi-Member LLC
- Member-Managed Vs. Manager-Managed LLC
- Domestic Vs. Foreign LLC
- LLC Vs. PLLC
Form Your LLC With CorpNet’s Help
After you’ve discussed your LLC options with your attorney and tax advisor, contact my team at CorpNet for expert assistance in preparing and submitting all your critical business documents. Our specialists assist business owners in all 50 states, streamlining the LLC formation process and ensuring that all filings get completed accurately, on time, and cost-effectively.
Contact us today for exceptional service, trusted expertise, and peace of mind!