The Different Types of LLCs | Tailor Brands (2024)

Did you know that there are 8 types of LLCs? As if choosing a business structure wasn’t tricky enough!

But here’s the thing: If you’ve already decided on starting an LLC, you’ve done the hard work. You know that an LLC legal structure enables you to moderate your liability and benefit from favorable tax treatment.

So, why are there different types of LLCs? How do you choose? And what effect will it have on your business?

Well, each type of LLC exists to make your life easier, and your choice depends on why you’re in business. Regarding the effect your choice will have on your future, read on and find out.

The first recording of an LLC legal structure originated in Germany around 1892. Wyoming state was the first to recognize it in America, initiating the first U.S.-based LLC in 1977.

The idea of the LLC business structure was to go beyond “sole-proprietorship and partnership associations,” enabling owners to create a tax-friendly company while maintaining a level of protection for their personal assets.

The LLC business structure achieves this by using pass-through taxation, equal to a sole-proprietorship or a partnership, but combined with the limited liability of a corporation.

And that’s great because it may help to protect your assets and reduce your paperwork!

And you can tailor an LLC legal structure to suit your company’s situation, making the different types of LLC ownership the ideal choice for most business owners.

While each state has its own rules regarding LLCs, their legal structure is similar. All that remains is to choose the right type of LLC for your business.

Wyoming created the first U.S. LLC to address the needs of local entrepreneurs who weren’t in a position to start a corporation but wanted limited liability protection while maintaining the simplified tax structure of a sole-proprietorship and partnership.

As the popularity of LLCs grew (there are over 2.5 million in the U.S. today), individual states came to realize the need for different types of LLC structures.

Today, each state governs LLCs in their own way; some recognize all 8 types while others only 5 or 6, and all have their own rules and regulations for running them.

The good news is all 8 types of LLCs are tailored for every imaginable business need; you just need to find the right fit.

Most business owners have similar wants, needs, and goals, but it’s how we achieve them that differs. That’s why you must choose the right type of LLC.

Fortunately, the procedure for registering each type of LLC is similar in most 50 states; where they differ is which type of LLC they recognize.

The big question is: What’s the best type of LLC for your business? And the answer is… it depends on what you want to accomplish.

To help answer both of these questions, let’s look at the 8 types of LLC:

Solo-entrepreneurs are best choosing the single-member LLC legal structure due to low set-up costs and minimal paperwork compared to other LLC structures.

However, like any business, there are legal obligations associated with starting and running one such as taxes and debts. As you’re going it alone, you’ll be solely responsible for compliance.

• You can approve and add new members
• It’s a simple tax system
• You can pass ownership over to others

• Increased paperwork compared to a sole-proprietorship, but the benefits are worth it
• You're required to submit compliance forms proving you’re following state rules
• It's important to maintain a corporate veil, which means (among others) - not acting illegally or mixing your personal and business finances. Piercing the veilputs your assets at risk

Even the most successful businesses include a dissolution agreement in their operating agreement, known as “a get-out clause.”

A get-out clause describes the situations that warrant an LLC dissolution and how it will proceed. And in case of illegal activity or internal disagreements, it’s a good idea to have one as it allows members to request involuntary dissolution.

• Unlimited members are allowed
• Members can include LLCs, corporations, and individuals
• Members can be from the U.S., as well as non-U.S. citizens
• As it’s an LLC, it’s considered a pass-through entity
• You can choose to be taxed as S or C corps

• You must register with your state
• More members mean more paperwork regarding formation and taxes
• Owners can only become employees of their LLC after they change their tax status

A domestic LLC is a business formed within its home state. A foreign LLC is when a legal entity does business in a jurisdiction or state other than its initial one.

For example, if you register your LLC and do business in Wisconsin but live in North Carolina, your LLC would be a foreign LLC in Wisconsin.

The reason LLCs choose a foreign LLC structure is because some states offer more business-friendly laws, cost-effective registration, and lower tax rates.

You’re only required to register as a foreign state if you’re trading full time or have a physical business location where you’re doing business.

And if you conduct business with a client out of state, you don’t have to register your business as a foreign LLC.

However, you must first get permission from that state to trade because you could face a hefty fine if you don’t.

• Registering a foreign LLC allows you to operate in a state that has advantageous business laws and taxes
• If your home state isn't suited to your business niche, you could generate more profits by trading in another state

• If you register in over one state, you’ll have to file articles of organization and taxes in each state, which isn’t cheap
• Each state has a distinct set of rules and regulations for running an LLC, and you’ll probably need professional advice from local lawyers and accountants
• You'll also need a business address in your foreign state to receive official mail on your behalf (if you don't have one, you can use a registered agent)

Most states require foreign LLCs and any trading in that state to file state income tax returns.

Check the state’s website where you’re doing business to ensure you’re complying with all legal and tax obligations.

The SLLC series (limited liability company) comprises an umbrella or parent LLC and smaller LLCs within its control, known as series LLCs or cells.

Each series/cell has its own members/managers, assets, and purpose. Each one is a separate entity within the parent series LLC.

So, if one series goes into debt or fails in its obligations, the liabilities are most likely only enforceable against that series. This makes them a popular choice for business owners with multiple interests.

For example: Jane’s a restaurant owner with a successful business in downtown LA, and she’s thinking of opening a second branch uptown.

By forming a series LLC, she’s reducing the risk for her financial investment in the first restaurant should the second one fail.

And real estate investors with several property investments could set each up as series-LLCs acting under the primary parent LLC. Thus reducing the chance of personal liability if the market flunks and the LLC is sued for failing to repay debts.

• You only need to pay for the parent LLC filing fee, and setting up series LLCs is quicker and cheaper than multiple LLCs
• You only have to file tax returns for the parent LLC (but it's a complicated matter so employ an experienced series LLC tax accountant)
• As there’s only one registered LLC, it allows you to save on administrative time and costs
• All series assets are independent and protected from each other
• While a series LLC acts as a corporation with subsidiaries, it's far less complex and expensive to set up

• Every LLC in the series needs its own bank account and separate accounting, and administrative costs could be high
• Depending on your state, you might require a separate registered agentfor each LLC in the series, pushing up the costs
• Forming a series LLC is more expensive than creating a regular LLC (but there’s no additional cost for adding more LLCs to your series)
• Series LLCs are a relatively new business structure, and legal questions are yet to be answered, one being what happens in the case of bankruptcy

Some states don’t allow Series LLC formation but recognize ones formed in other states; however, foreign LLCs can trade within these states.

The jurisdictions that allow series LLC formation include:

An L3C is often called the entity for entrepreneurs who value profits and purpose because it’s a hybrid created to attract philanthropic capital and private investment in ventures designed to generate profit and benefit society.

It gives a company the prestigious air of a not-for-profit institution, including the promising marketing strategies and positive press, while also making a profit.

• You do good for others, earn a profit, look great, and can sleep soundly
• It enables charities to create subsidiary L3Cs to pursue profitable ventures and support their cause

• Investors could lose their money without gaining any tax benefits
• Investors have limited knowledge or control of how an L3C uses investment funds
• Uncertainties surrounding the L3C’s status leave foundations and investors unsure about investing or donating

Because other businesses can’t be sure how you’ll spend their money, it makes it difficult to persuade them to invest. But where it falls flat with investors is donations that aren’t tax-deductible.

I mean, why would a company donate to those in need if they can’t save money in the long-run, right?

An anonymous LLC enables you to form an LLC legal structure without providing the identity of the owners, managers, or members.

The anonymous type of LLC ownership aids in minimizing legal liability and protects your privacy by keeping your ownership out of the public record.

Companies and individuals that use anonymous LLCs might want to keep their investment and involvement under wraps for various reasons, including their image.

Anonymous LLCs are also known as “confidential LLC” and “private LLC.”

• You can conduct your business without association (similar to a silent partner but with the control of an active one) and avoid any negative fallout generated by the industry
• It helps prevent others from gaining access to your data and then using it against you in a harassing manner
• Anonymous LLCs receive the same benefits as regular LLCs including, flexibility, flow-through tax advantages, and limited liability protection

• An anonymous LLC doesn't guarantee complete anonymity from the Internal Revenue Service (IRS) or your bank
• You still have to pay taxes
• If someone sues an anonymous LLC, an attorney can file a subpoena requiring owner identification

• Delaware
• New Mexico
• Wyoming

Nevada has always been a business-friendly state, proving so when they enabled the first restricted LLC structure on October 1^st, 2009.

This type of LLC ownership benefits those seeking lower tax rates when transferring assets to family members. It isn’t meant for conducting traditional business dealings and is only helpful for people with multiple properties.

To form a restricted LLC, all a company has to do is tick the appropriate box when filing its articles of organization.

And as the restrictions are flexible (by amending the LLC’s articles of organization), it’s a concept that should grow in popularity.

• Assets can't be liquidated, meaning they can’t be taxed (I’ll get into this more down below)

• A restricted LLC must wait 10 years after its formation before transferring assets to family members
• The amount of assets a restricted LLC can distribute to its members is limited by state law

While the assets can’t be liquidated, there is some ambiguity surrounding a restricted LLC and tax.

Available information indicates that a restricted LLC can re-evaluate its worth using what’s called a “new market-value formula,” reducing the company value and lowering federal and state tax liabilities.

Note: Always seek advice from a certified tax accountant with restricted LLC experience.

Many states require professionals who require state regulatory board licenses to trade, such as “accountants, legal advisers, and medical providers,” to form a PLLC legal structure.

A professional limited liability company works in much the same way as any other LLC entity, reducing the risk to owners, members, and managers from personal liability and providing equal flexibility regarding management structure and pass-through tax.

One exception is California. Professionals cannot form a PLLC or an LLC; instead, they must create a limited liability partnership or a professional corporation.

• PLLC members may not be liable for the malpractice of another member
• PLLC members may not be responsible for any lawsuits or business debts
• A PLLC can choose to pay tax as a pass-through entity or as a corporation
• PLLCs are easy to form, inexpensiveto run, and have fewer requirements and compliances of a corporation

• Not all states recognize PLLCs
• States that allow PLLCs might limit them to certain licensed professions
• You can only form a PLLC if at least one owner is a licensed professional
• In some states, every member must have a license in the same profession
• Only professionals can own a PLLC business
• Banks often require a PLLC to provide a personal guarantee to secure a loan, which can be risky if the business defaults, it will hold the guarantor liable for repayment

Now that you know what the 8 different types of LLCs are, you can choose the right one for your business.

But remember, it’s not only your government and state requirements that are important. Your requirements, driven by your dreams and goals, are equally important when choosing from the 8 types of LLC.

Take your time; there’s no rush. All that really matters is you choose the type of LLC that supports you and your business, enabling you to achieve the success you deserve.