Limited liability companies are popular business structures due to the fact that they blend the liability protection provided by incorporation while also maintaining some of the tax advantages of sole proprietorships and partnerships.

Additionally, limited liability companies are very easy to form, and the owners take on the tax obligations that they pay as personal taxes. However, there are various types of LLCs to choose from, and in order to make a well-informed decision, you need to know the pros and cons of each type of LLC.

The following guide will help you decide which LLC structure is ideal for your business.

Why is it important to form an LLC business structure?

The LLC structure comes with many advantages for small businesses. So let’s take a closer look at the many benefits of creating an LLC structure.

Protection of personal assets

The LLC or limited liability company is a legitimate corporate entity. Therefore, your personal and business assets are kept separate. So assets such as your family home, college funds, your kids or your family car, and any other personal property you have are protected in the event of legal action against your company. When compared to running a business as a sole proprietorship, this is a huge advantage.

Taxation flexibility

One of the advantages of forming an LLC is that you can choose to have your tax treated as though you’re an S Corporation. Alternatively, you can opt to have your business profits passed through to your federal personal income tax return.

Less paperwork

Forming an LLC requires fewer formation documents or paperwork and ongoing compliance requirements compared to the corporate structure. With an LLC, there is no need to nominate a Board of Directors, hold annual shareholders meetings, create annual reports, or deal with other formalities usually affiliated with incorporating a business.

Professional credit

The LLC designator at the end of your business name offers credibility in the eyes of prospects, customers, the business community, and vendors. Ultimately, having the designation of LLC on your business name helps instill trust and confidence in potential customers.

Types of LLCs to choose from

Now that you’re aware of the advantages of forming an LLC, the only thing left to do is decide on the ideal type of LLC for you. Many business owners share similar needs, wants, and goals. However, the way we attain them tends to differ. Ultimately, you need to choose the most suitable LLC type for your business in order to reach your goals. So let’s take a closer look at the different types of LLCs and how they can benefit your business.

1. Domestic and foreign LLC

Domestic LLCs are businesses formed within the home state of the LLC owner. A foreign LLC, on the other hand, is when the business or legal entity conducts business in a state or region aside from its original or initial one. So, if you register your business in North Carolina but conduct business in Wisconsin, then your LLC is a foreign LLC.

Domestic and foreign LLC pros

  • Could be ideal if your home state is not suited to your business niche.
  • By operating in a different state where business is booming, you could generate much more profit.
  • By forming a foreign LLC, you may operate in a region or state that has better or more preferable taxes and business laws.

Domestic LLC and foreign LLC cons

  • You’ll need a business address in the foreign state that you’re transacting in to receive official mail on your behalf.
  • Since business laws differ from state to state, you’ll need to acquaint yourself with the state laws of the state you’re doing business in.
  • If you want to conduct business in a specific state, you need to file an Articles of Organization and pay taxes in that specific region. However, you need to repeat this process for every single state that you would like to transact in, which will not end up being a cheap affair.

2. PLLC and LLC

There are lots of states that require professionals to have state regulatory board licenses to trade. Some of these professionals include legal advisors, accountants, and medical providers. A PLLC or professional limited liability company works in much the same way as any other LLC entity, where the risk to members, owners, and managers is prevented. It also provides a lot of flexibility regarding pass-through taxation and management structure.

PLLC pros

  • Members of a PLLC are not liable or accountable for the malpractice of another partner or owner.
  • A PLLC can choose to pay taxes as a pass-through entity or as a corporation. The owners of a PLLC may not be held accountable for any business debts or lawsuits.
  • PLLCs are relatively easy to perform, affordable to run, and also have far fewer requirements and compliance when compared to corporations.

PLLC cons

  • Many states do not recognize PLLCs as true business structures.
  • In order to form a PLLC, you need to be a licensed professional.
  • States that do allow PLLCs limit the formation of this business structure to certain licensed professional services.
  • Every member must have a license in the same profession in order to perform this business structure.
  • Financial institutes consider PLLCs as high risk and may need you to provide a personal guarantee to secure a loan.

3. Restricted LLC

One of the most business-friendly states in America is Nevada. The first restricted LLC structure was actually formed in Nevada on the 1st of October 2009. If you’re looking for lower tax rates when you need to transfer assets to family members, then this type of LLC would be ideal for you. However, you should note that it is only useful for individuals who have multiple properties and is not intended for traditional business dealings. In order to form a restricted LLC, all you need to do is tick the relevant box when filing Articles of Organization. Since the restrictions are quite flexible, this business structure seems to be growing in popularity.

Restricted LLC pros

  • Since assets can be liquidated, they cannot be taxed.

Restricted LLC cons

  • State law dictates the number of assets a restricted LLC can distribute to its members.
  • Prior to being able or permitted to transfer assets to family members, this business structure must operate for ten years after formation.

4. Anonymous LLC

An anonymous LLC allows you to create a legal LLC structure without having to provide the members, managers, and owners’ identities.

This type of business structure helps reduce legal liability as well as protects your privacy by ensuring that your personal data doesn’t become a public record. If you would like to keep your investments private for any reason, then this could be the ideal LLC formation type for you.

Anonymous LLC pros

  • Anonymous LLCs are afforded the same advantages as regular LLCs, including pass-through tax advantages, flexibility, and limited liability protection.
  • An anonymous LLC will prevent anyone from accessing your personal data and using it to manipulate you.
  • Another benefit of anonymous LLCs is that it allows you to conduct your business without association, avoiding negative fallouts generated by the industry.

Anonymous LLC cons

  • With anonymous LLCs, you are still responsible for taxes.
  • While your identity is not made public, in the event that someone sues you or the LLC, a lawyer may decide to file a subpoena to gain access to your identity.
  • While an anonymous LLC is somewhat anonymous, it doesn’t guarantee 100% anonymity from the bank or Internal Revenue Service (IRS).

5. Series LLC

The series LLC is also referred to as SLLC and is made up of a parent LLC, that controls a number of smaller LLCs referred to as Series LLCs. Each series co its own managers, members, purpose, and assets.

Everyone is an unrelated entity under the umbrella series LLC. If one of the series fails its obligations or falls into debt, then the debt can only be enforced against that specific series.

Therefore, it seems to be an interesting option for LLC owners with several or multiple interests. This would be a good LLC type for real estate investors who have a handful of property investments and want to set each one up as a series under the umbrella LLC. Therefore, the instance of personal liability in the event that the market plummets is reduced.

Series LLC pros

  • Series LLCs are far less expensive and complex to startup, even though it acts as a corporation with subsidiaries.
  • The assets of the series are protected and independent from each other.
  • With a series LLC, you’ll be able to save on administrative costs as well as time since there’s one LLC registered only.
  • Only the parent LLC is responsible for filing tax returns.
  • You’re only liable to pay the umbrella LLC filing fee, as well as the costs to set up each series. The process is faster and more affordable than creating several separate LLCs.

Series LLC cons

  • Series LLC is still a recent business structure, therefore, lots of questions need to be answered; for example, what’s the next step in the event the business runs into the ground?
  • Series LLC formation tends to be more expensive than regular LLC formation.
  • Based on your state of formation, you may or may not need an additional statutory agent for each series LLC.
  • Additionally, each LLC in the series must open a business or corporate bank account as well as separate accounting, which could send administrative costs soaring.

6. Single-member LLC

If you’re a solo entrepreneur or sole proprietor, then the single-member LLC structure could just be the ideal LLC type for you. This is due to the minimal paperwork and low setup costs involved as compared to other LLC structures. However, as is the case with every business structure, there are legal obligations that need to be adhered to when creating and operating any business. With the single-member LLC, you are the only member and, therefore, solely responsible for compliance in terms of taxes and debts.

Single-member LLC pros

  • You can pass ownership over to others.
  • The tax system is fairly simple.
  • You are allowed to add and approve new members.

Single-member LLC cons

  • You need to maintain a corporate veil, and this involves not mixing personal and business finances or acting illegally.
  • In order to prove that you’re following state goals, you’ll need to submit compliance forms.
  • When compared to starting a sole proprietorship, starting a single-member LLC comes with far more paperwork.

Read more:  How to start an LLC

How do LLCs differ from other business structures?

Let’s have a closer look at how LLCs are different from other business structures:

LLC vs. Corporation

  • LLCs are owned by one or more individuals, while corporations are owned by its shareholders.
  • LLCs may choose between being taxed as a partnership or corporation, while corporations are separate taxable entities.
  • LLCs have a minimum amount of formal annual requirements and are easy to maintain, while corporations need to hold meetings to maintain corporate status.

LLC vs. Partnership

  • One individual may own an LLC, while partnerships require at least two members to be formed.
  • LLCs may also have foreign businesses and individuals as active owners, whereas partnerships are not allowed to do so.
  • In order to form an LLC, you must obtain a Certificate of Formation with the state where your business is organized; however, when forming a partnership, you’re not required to file any paperwork or obtain any documents from the local government in order to operate legally.

LLC vs. S corp

  • LLCs may have an unlimited number of members, while S corps must have a maximum of 100 shareholders or owners.
  • S corporations can’t be possessed or owned by LLCs, partnerships, corporations, or many trusts, while this is not the case for LLCs.
  • LLCs are allowed to have residents and non-US citizens as members, while S corps are not allowed to have residents and non-US citizens as shareholders.

LLC vs. Sole Proprietorship

  • LLCs are legal entities formed at the state level and exist separately from their owners, referred to as members, whereas sole proprietorships are unincorporated businesses owned and operated by one person.
  • When forming an LLC, your personal assets are protected when it comes to claims against your company or business debt collection; however, with a sole proprietorship, there is no separation between you and the business, and therefore you have no personal assets protection.
  • LLCs must keep their business and personal finances separate or face the risk of losing their limited liability protection, whereas sole proprietorships do not need to separate personal and business accounts since they are considered one and the same.


What type of structure is an LLC?

A limited liability company LLC is considered a separate and legal business entity. It is a legal structure.

What are the different types of business structures out there?

Depending on your goals and niche, there are various business structures available for formation, including C corporations or C corps, general partnerships, member-managed LLCs, limited liability partnerships or LLPs, manager-managed LLCs, and nonprofit corporations.

What is an LLC operating agreement?

An operating agreement is not just a key document but a legally binding one that limited liability companies make use of to outline how the company will be operated and managed, much like the bylaws. Ultimately, the operating agreement helps to set down the guidelines, duties, and responsibilities of each member of the LLC or limited liability company. This streamlines the operations and helps avoid disputes.

Where do I register my LLC?

Irrespective of the type of LLC structure you’ve decided on, you need to register your business with your secretary of state’s office.

How can I avoid double taxation?

One of the best ways to avoid double taxation is to register your business as a pass-through entity. In this way, profits go directly to the owners and are not taxed at the corporate level but more on the personal level.