What Are The Different Types of LLCs?

November 19, 2020

This article is for educational and entertainment purposes only. This is not legal advice and should not be relied on as such. Every case is different. Consult a licensed professional in your state. Viewing this website or its content does not create an attorney-client relationship with Lyda Law Firm or any of its lawyers.

This article is for educational and entertainment purposes only. This is not legal advice and should not be relied on as such. Every case is different. Consult a licensed professional in your state. Viewing this website or its content does not create an attorney-client relationship with Lyda Law Firm or any of its lawyers.

If you're starting a business, you've probably thought about forming a limited liability company (LLC). If not, you've probably seen the term "LLC" in a business name (which is actually required in some states, like Colorado, unless you use a DBA). LLCs are great because they limit your personal liability, meaning only your business assets are at stake if you are sued.

There are several different business structures you can choose from when forming an LLC that will affect how your business entity is protected, it can even affect your local and federal tax rate.

In this article, we're going to talk about the different types of LLCs and why you might want to choose one over the other.

Single-Member LLC vs. Multi-Member LLC

The first distinction between different types of LLCs is whether your LLC is a single-member LLC or a multi-member LLC.

This one is pretty self-explanatory. In this context, a member is considered an owner of the LLC. That means that a single-member LLC has a single owner. Keep in mind, a single-member LLC is different from being a sole proprietor because it offers liability protection. Also, as a sole proprietor, you only file a single personal income tax return form. If you form an LLC, you nee to file your personal return and a separate return for your LLC.

As you might have guessed, a multi-member LLC means that there are multiple owners. This is sometimes called a limited liability partnership or LLP. And just like a single-member LLC, a multi-member LLC offers more protection than a general partnership.

The number of people your company employs has nothing to do with this distinction. You can have 100 employees, and as long as there is only one owner, it is still a single-member LLC.

It is important to note that LLCs can be owned by individuals or by other LLCs. So, if you have multiple LLCs that own a single LLC, that would be considered a multi-member LLC. If just a single LLC owns another LLC, that is still a single-member LLC. If you’re considering a more complex LLC structure, it’s highly recommended that you hire a professional for legal and record-keeping purposes.

Another important note about multi-member LLCs - when you go into business with a partner or multiple partners, it is even more important to outline exactly how you plan on doing business in your operating agreement. There should be bylaws in your partnership agreement that specify how disputes between general partners are handled. The last thing you want is to start a business with a partner and later down the road have a dispute because you didn’t set clear expectations and guidelines.


Member-Managed LLC vs. Manager-Managed LLC

Another distinction between different types of LLCs is member-managed vs. manager-managed LLC. When you register your LLC at the state level, you will declare whether your LLC is a member-managed LLC or a manager-managed LLC.

A member-managed LLC is where the actual member(s) of the LLC (the owner(s) of the LLC), runs the show and manages the operations of that LLC.

A manager-managed LLC is when the member (or members) of an LLC delegate the task of managing that LLC to another person who is a non-member. 


Holding/Umbrella LLC vs. Operating LLC

Another significant distinction you’ll see among LLCs are holding (or umbrella) LLCs and operating LLCs.

Some companies exist only to hold assets, like real estate, or to act as an umbrella holding company for other subsidiary companies. Those are considering holding companies. The reason that holding companies exist is to create additional layers of protection from liability.

On the other hand, you have actual operating LLCs. An operating LLC is a simple structure where the LLC exists to run a business (as opposed to existing to own assets). Most small businesses start out as operating LLCs.


S-Corporations vs. C-Corporations

This variation is a little bit different because S-corps and C-corps deal with how your LLC is taxed at the federal level. LLCs must declare a different tax treatment between the state and federal level because the idea of an LLC is a state law concept. That means that the IRS does not have a defined way to tax LLCs.

It’s important to note that your business can be any of the above types of LLCs while also being an S-corp or a C-corp.

Default Tax Treatments

If you are a single-member LLC, the IRS will default to taxing your business like a sole proprietorship. This isn’t necessarily a bad thing and some people prefer this tax treatment. The general rule of thumb is that if you are making less than a full-time wage (around $48,000) from your business, then a sole proprietorship may be the best way legal entity type for tax purposes.

If you are a multi-member LLC, the IRS will default to taxing your business like a partnership. The same general rule of thumb applies here.

Full disclosure: We are not tax experts. Consult with a local tax professional to discuss the potential tax advantages or disadvantages of different types of LLC taxation.

S-Corp Tax Treatment

If you do not want to be taxed as a sole proprietorship or a partnership, you can elect to have subchapter S-corporation tax status.

For some companies, S-corp taxation comes with corporate tax advantages. For instance, if you are making more than a full-time wage. The main tax advantage is that you still get the benefit of pass-through taxation. 

Pass-through taxation (roughly) means that you don't have to pay taxes at both the company level and the individual level. Traditionally, corporations are taxed at the business level, and then when you take money out of the business, you're taxed on that money as well. That's referred to as double taxation - you don't want that unless you have to. That's why many business owners select S-corp treatment for their LLCs. 

So how do you elect for S-corp taxation and take advantage of the tax benefits?

When you register for your Employer Identification Number with the IRS, you simply check a box for what you want your tax treatment to be. But checking that box won't be enough, you also need to fill out Form 2553 and snail mail it to the IRS.


As you can see, there are many types of LLCs to match the many types of businesses out there. This is a complex decision with complex consequences. If you have any questions, contact a professional who is licensed in your state.

As we mentioned earlier, all of the LLC types are all the same basic legal structure, and, depending on your state, you register them in the same way.

Keep in mind that your LLC can fall into multiple categories. For instance, you can be a single-member LLC that is a member-managed LLC and an operating LLC. In fact, that is probably the most common arrangement for small business owners.

There are many different uses for LLCs, which result in different ways of setting them up. But they are all the same basic legal structure. The distinctions that we’ll outline in this section simply examines a few key differences between types.

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