There are many types of LLCs available to business owners. Some are recognized by all 50 states while others are only recognized by some states. Let’s now take a look at the most common types of LLCs, including what they are and who they’re best for.
Domestic LLC
Domestic LLCs are limited liability companies that are incorporated and operate in only one state. Domestic LLCs are the most common type of limited liability company and are subject to the specific laws and regulations of the state in which they are formed. This differs from a foreign LLC that is incorporated in one state but operates in other states.
Here’s who should consider using a domestic LLC:
- Most small business owners: Startups and small businesses that have headquarters or operate in only one state should consider a domestic LLC.
- Real estate investors: Real estate professionals such as investors typically form a domestic LLC to hold ownership of their real estate investments in a specific state.
- Freelancers and consultants: Self-employed people such as solopreneurs, freelancers and consultants typically incorporate using a domestic LLC in the state they reside.
- Brick-and-mortar businesses: Businesses with brick-and-mortar locations within a single state, such as retailers, typically use a domestic LLC.
- Some e-commerce and online businesses: E-commerce businesses, even though they may sell nationally, sometimes use domestic LLCs if they operate within a single state.
- Hobby and side-hustle businesses: Those with side businesses may use a domestic LLC to separate personal and business finances and protect themselves from liability.
Foreign LLC
A foreign LLC is a type of domestic LLC that’s formed in one state, the domestic state, and registered to do business in one or more other states, also known as the foreign state. A foreign LLC therefore operates in multiple states even though it’s incorporated in only one state.
To be considered a foreign LLC, businesses need to maintain offices or a physical presence, regularly solicit business, own or lease real estate or more in a foreign state. Foreign LLCs that meet these requirements must register with the foreign state’s filing office. Foreign LLCs are typically right for the following:
- Businesses with a multi-state presence: Companies with a physical presence in multiple states, such as an office or brick-and-mortar location, often use foreign LLCs.
- Real estate firms with a multi-state presence: Real estate holding companies with properties in multiple states may use a foreign LLC structure.
- Franchise businesses: Businesses with franchises or license agreements in multiple states can use a foreign LLC to establish legal presence in states with franchise locations.
- Some e-commerce and online businesses: Some online businesses that regularly sell products or services to customers in specific states may consider a foreign LLC.
Professional LLC (PLLC)
A professional LLC, also known as a PLLC, is a type of limited liability company used by licensed professionals, such as doctors, lawyers and accountants. Professional LLCs are similar to domestic LLCs with added requirements and restrictions for licensed professionals.
For example, professionals must adhere to a code of conduct for their profession. All PLLC owners also must be licensed professionals for which the LLC was formed with any necessary permits. PLLCs are recognized in 29 states.
Nonprofit LLC
A nonprofit LLC is a type of corporation formed with the intent of conducting charity work or public benefit activities. A nonprofit LLC is similar to a standard LLC but includes additional benefits and requirements. For example, to become eligible for a nonprofit LLC, your organization needs a public mission, restrictions on profit distributions, limited ownership and must follow nonprofit regulations established by the state in which it’s incorporated.
However, nonprofit LLCs receive certain advantages, such as tax-exempt status. This means that they don’t pay taxes and donors can receive tax advantages for charitable contributions. Nonprofit LLCs are only recognized in five states; however, many states recognize a traditional LLC with a nonprofit purpose.
Low-Profit LLC (L3C)
A low-profit LLC, also known as an L3C, is a blend of a traditional LLC and nonprofit LLC offered in 15 states. It offers similar liability protection to its business owners but requires the business to pursue a social mission. Unlike a nonprofit LLC, it can generate revenue and profit and is subject to pass-through taxation. On the other hand, it can receive certain tax benefits such as tax deductions for charitable contributions.
L3Cs are subject to additional requirements. For example, it must significantly further a charitable or educational purpose, cannot produce income as its primary goal and cannot have political purposes. For this reason, L3Cs are best for business entities that operate in industries with a social mission, such as environmental sustainability, and expect to generate some profits as well as conduct some nonprofit activities such as accepting contributions.
Series LLC
A series LLC is a business structure that includes a parent or “umbrella” LLC as well as one or more sub-LLCs that operate beneath it. This type of liability company offers advanced liability protection since each sub-LLC operates as its own legal entity. It also offers streamlined business management since all LLCs can be managed under the primary umbrella LLC. Series LLCs can be taxed separately or as part of the primary LLC.
Series LLCs are only recognized in 19 states and are best for those wanting to protect various business assets from the liability of another using their own LLC entities, such as the following:
- Real estate investors: Some real estate investors use a series LLC to separate each property investment into its own LLC to protect one property from the liabilities of another.
- Companies with diverse investments: Businesses that have multiple lines of revenue or business investments may use a series LLC to separate each business unit.
- Intellectual property holders: People or companies holding intellectual property assets such as patents or trademarks may separate each asset using a series LLC structure.
Anonymous LLC
An anonymous LLC is a lesser-used type of LLC that’s only offered in three states—Delaware, New Mexico and Wyoming. Anonymous LLCs offer the same benefits as a traditional LLC but offer advanced privacy protection for its owners. This may be the right business structure for public figures or businesses that own assets—such as intellectual property or art—and want to maintain ownership anonymity.
Restricted LLC
A restricted LLC, only offered in Nevada, can’t be taxed or make profit distribution for 10 years after formation and is used primarily to transfer assets from one party to another. It allows you to transfer assets without paying taxes and also protects you from the liability of the transferred assets.
