When starting a business, one of the fundamental decisions you must make is choosing your legal business structure. And most probably, you’ve been advised to form a limited liability company (LLC). If not, you’ve possibly seen the acronym ‘LLC’ in a business name—a requirement for most states. Limited liability companies do as their name implies in the event of a legal issue: they limit your liability so that only your business assets are at risk.
An LLC is a composite structure that permits shareholders, partners, or owners to contain their liabilities and enjoy flexibility benefits and partnerships tax. Its members are protected from personal responsibility for the company’s debts if they can substantiate their innocence and didn’t incur the debts intentionally.
The cost of starting an LLC involves a state filing fee and varies according to the state you’d like to register your business in. If you want to register, you can visit your state’s investments department or get LLC online. Remember, you don’t need to be a big corporation to register an LLC; even small businesses can. But you must first understand the various types of LLCs before you decide which one will suit your business.
This article discusses the three main types of LLCs, their advantages and disadvantages, and which of them is best for your business model. Please read along to understand more about these LLCs.
Types Of LLCs
There are various types of limited liability companies, which are categorized according to their management and ownership. They include:
1. Single-Member LLC
A single-member LLC is a type of business with only one owner, a solo-entrepreneur. Compared to other types of LLCs, it has the lowest paperwork to file and low set-up costs. Remember, as a sole manager, you’ll be fully responsible for all debts and taxes associated with this type of business.
The state can decide a line of action if an LLC experiences managerial disagreements or falls into financial problems. However, with a single-member company, you may not face administrative disputes, but you may incur debts and face legal action. And since you’re the only owner, you may lose the limited liability protection and be legally held accountable. You can avoid liability by drafting an operating agreement that separates you from your LLC. You can learn more about different business structures and their liability with LegalVision NZ.
- Simple taxing system
- Easy transfer of ownership
- You can add or approve new members
- You can’t mix your personal and business finances
- You have to file a lot of paperwork on your own
2. Multi-Member LLC
From its name, a multi-member LLC has more than one member. It’s slightly different from its single-member counterpart in that all members must sign and consent to the operating agreement; otherwise, their set-up is similar. In a multi-member LLC, members pay taxes according to their share of company profits and losses.
Depending on how the members agree, a multi-member LLC can either be manager-managed or member-managed. In manager-managed LLCs, members decide to act passively and hire experienced personnel to run the company. On the other hand, a member-managed multi-member LLC has its members running all company activities. The arrangement must be stipulated in the operating agreement in all cases.
- You can decide whether to be taxed as C or S corporations
- Members can be citizens or non-citizens
- Members can include individuals, corporations, or another LLC
- It has no limit to the number of members
- As a member, you have to change your tax status to become an employee of the LLC
- As members increase, the paperwork load will increase
- It has to be registered in your state of residence
3. Series LLC
A series LLC is a special type of limited liability company with unrestricted separation of assets, membership interests, and operations. Each series operates like an independent company run by different members and managers and has its records, books, bank account, and unique name. The responsibilities of members vary depending on the series; they may sue or be sued, get contracts, and own property. This means assets owned by one series are protected from potential liability from other series within the same LLC. Series LLCs are a common option for business owners with several interests.
For example, if you own a hotel and your business is good, you may think of opening a second branch within the same or different town. To reduce your risks, you form a series LLC that makes your second investment independent from the first. And if one investment fails, the other is protected from liability.
However, not all states allow you to form a series LLC; please confirm from your state’s department if you’re allowed to create one. Moreover, each state has an independent way of taxing a series LLC; however, most states tax them as one entity.
- It’s relatively less expensive and complex to set up, considering the number of series you can create
- All assets from each series are independent
- Saves on administrative costs and time since only one LLC is registered
- You only file returns for the parent LLC
- Legislative questions such as the course of action in case of bankruptcy are yet to be answered
- It’s more expensive to set up than a single or multi-member LLC
- Each series requires an independent accounting and banking system, making it relatively expensive
Which Is Best For Your Business?
Selecting the best option from different types of LLCs can be difficult. But you can begin by examining the objectives of your business while conforming to legislation in your state. Then, decide the number of members you need to involve. For instance, a single-member LLC would be your best choice if you want to personalize your business. But a multi-member LLC can work best if you have many members.
If you’d like to spread and protect your risks, a series LLC would be a wise option. Whatever your decision, remember to get insurance for your LLC to protect yourself from any financial issues.
Furthermore, you must agree with your members on your limited liability company’s preferred management mode. That is if you want to be a manager-managed or member-managed LLC. Ensure you work on your taxes and financial records to avoid legal action.
In order to know the type of LLC that fits your enterprise, the best approach is to seek professional advice before registering your business. An expert consultant is best placed to analyze your product type and business goals and suggest an appropriate structure that’ll yield maximum benefits. Professionals can also do the paperwork on your behalf and take the burden off your shoulders.