Types of LLCs: Which One is Right for Me
Updated: Jan 4, 2019
As we discussed in LLCs and Why We Like Them, an LLC is short-hand for limited liability company. An LLC is a legal entity which provides its owners (called members) the limited liability protection of corporations and the tax advantages of pass-through entities such as partnerships.
LLCs have many benefits, one of which is the flexibility in formation they offer. LLCs come in a wide variety, each one designed to fit its member’s needs.
Types of LLCs:
Single Member LLC: This LLC has only one member. If a single-member LLC chooses not to become a corporation, it is classified as a “disregarded entity" and is taxed as a sole proprietorship. LLCs can also be taxed as an S-corporation or a C-corporation.
Multiple- Member LLC: An LLC with more than one member. Ownership percentages can be divided in a multitude of ways and do not need to be equal among all members.
Domestic LLC: If you formed and operate your LLC within the state you reside, then it is a domestic LLC. The state in which your LLC was formed has the authority to govern your LLC.
Foreign LLC: If you form your LLC in one state but operate it in another, then your LLC is considered a Foreign LLC by the state in which you are operating. For example, if you form your LLC in Delaware but operate it in California, then California views your LLC as a foreign LLC. If you operate your LLC in a different state then it was formed in, you must register your foreign LLC with the state in which it is operating. In California, you must file a Form LLC-5.
Member- Managed LLC: When forming an LLC you have the option of deciding whether it should be Member managed or Manager managed. In a Member managed LLC all members take part in the management and operation of the LLC equally. Each member has a vote and can make decisions on behalf of the LLC.
Manager-Managed LLC: In a Manager managed LLC only certain people (members or non-members) control the business. The controlling person is known as the manager(s). The other members are passive and don’t have a hand in running the business.
Series LLC: This type of LLC is relatively new and is only recently becoming popular. A Series LLC is where one LLC is formed to act as the main umbrella LLC over a series of separate LLCs, thereby each separate entity is theoretically protected from liabilities arising from other in the series. However, Series LLCs are not available in every state. As of the date of this writing, Series LLCs were only available in Alabama, Delaware, District of Columbia, Illinois, Indiana, Iowa, Kansas, Minnesota, Missouri, Montana, Nevada, North Dakota, Oklahoma, Tennessee, Texas, Utah, Wisconsin, Wyoming, and Puerto Rico. Please note that a Series LLC cannot yet be formed in California.
L3C: Is a legal entity that can be created by a for-profit company that has a socially beneficial purpose. The L3C is a hybrid structure that combines the legal and tax flexibility of a traditional LLC, the social benefits of a nonprofit, and the marketing positioning advantages of a social enterprise. Unlike traditional LLCs, the L3C's articles of organization are required by law to mirror the federal tax standards for program-related investing. A program-related investment (PRI) is one way in which foundations can satisfy their obligation under the Tax Reform Act of 1969 to distribute at least 5% of their assets every year for charitable purposes. L3Cs are available in Illinois, Kansas, Louisiana, Maine, Michigan, Rhode Island, Utah, Vermont, Wyoming, and Puerto Rico. Please note that a L3C cannot yet be formed in California.
Restricted LLCs: A restricted LLC was created in Nevada and is still only available there. A restricted LLC is restricted in the way it can make distributions, while a Series LLC does not have any restrictions. Distributions are periodic payments made by the LLC to its members. A restricted LLC cannot make business distributions to its members until it has existed for 10 years.
Anonymous LLC: Anonymous LLCs are companies where ownership details are restricted for viewing by the public. Presently, only New Mexico allows formation of a completely Anonymous LLC.
To determine the right entity for your business, please contact O’Neill Tran Law today for a free consultation.