LLCs are a very popular type of business entity however it’s important to know which type of LLC is best for you business. The type of LLC you choose will affect your business protection and federal tax clauses.
What are the Different Type of LLCs
To understand which type of LLC will best suit your business needs, it is important to first understand the various types of LLCs available. Here is a breakdown of some common types of LLCs:
● Single-member LLC/sole proprietorship
This type of LLC has only one owner who can hire employees. Sole proprietors, on the other hand, do not have that option. Business taxes can be passed through as part of the owner's personal tax return to avoid double taxation. However, sole proprietorships do not offer personal liability protection.
● General partnership
This is an informal business arrangement where two or more people agree to own and operate the LLC equally, sharing profits and losses. Each partner is legally considered the same entity as the business, so no personal liability protection exists. However, partners can pass business through on their personal tax returns.
● Family limited partnership
Family limited partnerships are formed by family members who pool resources to establish and run a business. There are two types of owners in FLPs - general partners, who are responsible for the operation, and limited partners, who have no management responsibility but can still purchase ownership to receive income. This type of LLC is popular among families who want to pass down generational wealth.
● Series LLC
A series LLC allows an owner to separate business assets and operations into different subsets, called series. Each subset functions as a regular LLC but also protects individual series from liabilities incurred by other subsets. Note that not all states recognize series LLCs, so it's best to check with your local legislature.
● L3C company
L3Cs are a hybrid structure that combines elements of an LLC and a nonprofit business. While L3Cs can profit, this income must benefit a charitable cause. However, not all states recognize this business structure.
● Member-managed LLC or manager-managed LLC
Member-managed LLCs are managed by all owners (or members) who share responsibility for day-to-day operations. This type of LLC is common with small to mid-sized businesses. On the other hand, manager-managed LLC structures are more common for larger-sized businesses or owners who want a less active management role. In this case, members might designate one or more members to handle day-to-day activities or hire employees to take on these responsibilities.
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