In November 2024 alone, there were almost 450,000 business applications in the US. This was an increase of 5.5% from October, which shows that an increasing number of Americans are pursuing their small business dreams.
If you’d like to follow suit, then you might be looking into forming a limited liability company (LLC) since it protects your assets and offers other benefits too. There are several types though, so you might be thinking, “What type of LLC is best for me?”
There’s no single right answer, but if you’re educated on the LLC types, you’ll make a better-informed decision. So in this article, we’ll discuss the various setups you can consider.
What Type of LLC Is Best for Me?
First of all, you can either have a single-member LLC or a multi-member LLC. As the names suggest, you can run the LLC on your own in the first option, or you can add other members (or owners) in the second one.
Let’s explore each choice in more detail below.
Single-Member LLC
A single-member LLC is the simplest type of LLC, which makes it ideal if you don’t want to deal with complicated business operations but want liability protection. This can separate your personal and business liabilities, which means that your personal assets aren’t at risk should your LLC face lawsuits or debts.
There’s minimal paperwork and maintenance involved, so it’s perfect for solo entrepreneurs like:
- Freelancers
- Consultants
- Gig economy workers
- Anyone running a business independently
The default taxation is the same as a sole proprietorship, which is pass-through income to your personal tax return. However, you can elect S-corp or C-corp taxation if needed.
The caveat to forming a single-member LLC is that there’s no shared responsibility or ability to divide ownership; you have to rely solely on yourself. Also, some states charge higher fees or have stricter regulations for single-member LLCs.
Another thing to note is that in some states, you can list the LLC name instead of your personal name for business purposes. As a result, you’ll enjoy more privacy.
Multi-Member LLC
A multi-member LLC has two or more members and has a flexible structure for partnerships. Each member can share profits, losses, and management responsibilities, which should be outlined in the company’s operating agreement. Everyone still benefits from liability protection in this structure too, and this LLC type makes it easier to raise capital, as you can bring in new members or investors.
A multi-member LLC is great for:
- Partnerships
- Teams starting a business together
The default taxation here is as a partnership (pass-through), but like with a single-member LLC, you can opt for S-corp or C-corp taxation.
While you’ll have more people to spread responsibilities to, this is a double-edged sword. Conflicts can arise if roles or responsibilities aren’t clear. There’s also a more complex management style since you’ll need an operating agreement to define roles, profit-sharing, and exit strategies.
Member-Managed vs Manager-Managed LLCs
There are also two management styles for LLCs: member-managed or manager-managed.
In a member-managed LLC, the members are involved in day-to-day operations, and this structure is best for small businesses or hands-on owners. In a manager-managed LLC, you’d appoint a manager to run the business, and that can be a member or an outsider. This is best for businesses where owners want a more passive role or LLCs that have numerous members.
The Types of LLCs
Now that you know what the differences are between single and multi-member LLCs, and the management styles, it’s time to go over the types of LLCs available.
Domestic vs Foreign LLC
Domestic LLCs are ones that are formed in a state and operate there too. The “foreign” in “foreign LLCs” doesn’t mean they’re out of the country; instead, they’re registered in one state but operate or conduct business in another state.
Typically, new business owners opt for domestic LLCs. There’s simpler compliance (only one set of state laws to follow) and lower administrative costs. This makes it ideal for companies that operate in one state only.
If you’re looking to expand your business, or need to operate in multiple states simultaneously, then a foreign LLC can be good. You can do so while maintaining the same legal entity, but you’ll have an increased compliance burden. Plus, you’ll have additional filing and annual fees.
Professional LLC (PLLC)
A PLLC is specifically for certain licensed professionals, such as:
- Doctors
- Lawyers
- Architects
- Accountants
- Engineers
In fact, some states require you to form a PLLC if you’re one of these professions.
With this LLC structure, you’ll get liability protection for business debts. However, do note that members may still remain personally liable for professional malpractice.
In addition, PLLCs allow professionals to work together under a single entity while still complying with state regulations. It may require members to maintain active professional licenses though.
Series LLC
A series LLC basically allows you to have multiple LLCs under one main one. They’re considered multiple “series” or sub-entities.
Each series can operate as a separate entity with its own assets, liabilities, and management. This makes it cost-effective, as one LLC filing covers multiple business units. What’s excellent about this setup si that liabilities in one series don’t affect others, and this makes it ideal for managing multiple ventures or investments.
Series LLCs are complex to set up and maintain though, and they’re not recognized in all states. With that said, they’re great for real estate investors who are managing multiple properties, e-commerce entrepreneurs who are managing multiple product lines, or venture capitalists.
Nonprofit LLC
As the name suggests, a nonprofit LLC is formed to operate for charitable, educational, or other nonprofit purposes. You can still earn revenue with it, but these profits must go towards the organization’s mission rather than to the members.
With a nonprofit LLC, you can get liability protection while running nonprofit activities, and it has simplified management in comparison to forming a nonprofit corporation. In addition, some states allow you to apply for federal tax-exempt status, although it can be time-consuming and difficult to meet the strict requirements.
The main downside is that you can’t distribute the profits to members. Plus, most states don’t let you form this LLC type. Otherwise, a nonprofit LLC is ideal for social impact projects, community organizations, or charities.
Low-Profit LLC (L3C)
L3Cs are similar to nonprofit LLCs, but the main difference is that you can distribute the profits to members. The company won’t be tax-exempt either.
Like with nonprofit LLCs, you won’t be able to form L3Cs in most states. However, every state allows you to operate L3Cs in them, so that’s a huge advantage.
Anonymous LLC
This is a rare type of LLC you can create, and at the time of writing, it’s only available in three states: Delaware, New Mexico, and Wyoming.
What makes this LLC type amazing is that LLC member information is anonymous. This gives you more privacy and lessens things like spam.
Consumers may find your LLC not as credible though. And in some cases, you’ll still be required to divulge LLC member information, such as through lawsuits.
Restricted LLC
This is an even rarer LLC type since it’s specific to one state: Nevada. A restricted LLC can’t be taxed for 10 years, but you can’t make distributions to members either.
In general, people use restricted LLCs to transfer assets.
Choose the Right Business Structure
If you’re asking, “What type of LLC is best for me?” then the only person who can answer that is you. The fact is that one LLC type might be perfect for you while it’s not for another entrepreneur.
The most important thing is that you assess your needs and goals, and then go from there. And now that you know much more about LLC types, you can pick one that will make your company thrive.
Sign up with Business Anywhere if you’re ready to form your own business. We have a free business registration service you can use.
