Nearly half of all small businesses in the US are set up as limited liability companies (LLCs). Exactly how each LLC is set up helps determine how that particular business runs. The LLC structure affects who has decision-making power, how liability protection and taxes work, and how straightforward it will be for the business to grow or change over time.

Below, we’ll explain how LLCs are structured legally and operationally, the different types of LLC structures available, and how to choose the right one for your business.

What’s in this article?

• How are LLCs structured?
  
• What different LLC structures are available?
  
• What are the differences between member-managed and manager-managed LLCs?
  
• What are the benefits and drawbacks of LLCs for small businesses?
  
• How to choose the right LLC structure for your business
  
• How Stripe Atlas can help
  

How are LLCs structured?

An LLC structure has two layers: the legal shell created by the state and the operating rules created by the LLC’s owners. The first establishes the company as a separate legal entity, while the second determines how it runs day to day.

The combination of two agreements decides the exact structure.

Articles of organization

An LLC is formed by filing articles of organization (sometimes called a certificate of formation) with a state authority, often the secretary of state. Filing legally creates the company and establishes it as separate from its owners. This separation enables “limited liability,” which means that business debts and legal obligations stay with the company itself instead of applying to the individuals behind it.

Operating agreement

An operating agreement is the LLC’s core internal document. It outlines important elements of the business, such as ownership percentages, voting rights, profit and loss allocation, management authority, member exits, and what happens if the company dissolves. Members sign on to and abide by this agreement.

In an LLC, ownership is expressed through membership interests rather than shares of stock. In most states, an LLC can have one member or many, and members can be individuals, companies, trusts, or foreign entities. Who the members are and what level of ownership they have are defined in the operating agreement.

What different LLC structures are available?

All LLCs share the same legal foundation. But there are several common variations designed to fit different ownership, management, and regulatory needs.

Here are the options:

• Single-member LLC: A single-member LLC has one owner. Solo founders often use this structure. It provides limited liability with minimal administration requirements and is taxed as a disregarded entity by default.

• Multimember LLC: A multimember LLC has two or more owners. This structure supports shared ownership, flexible profit allocation, and collaborative or delegated management. It’s taxed as a partnership unless another election is made.

• Member-managed LLC: In a member-managed LLC, all members participate directly in running the business. This is the default model in most states, and it works well when owners are actively involved in day-to-day operations.

• Manager-managed LLC: In a manager-managed LLC, the members appoint one or more managers to operate the business. This model separates ownership from control and is useful when some members want to be less active.

• Professional LLC: A professional LLC is designed for licensed professionals such as lawyers, doctors, and accountants. It offers limited liability for business obligations but doesn’t shield members from personal malpractice liability. Not all states recognize professional LLCs. But in some states, professionals in certain categories are required to form one rather than a basic LLC, depending on the respective licensing boards.

• Series LLC: A series LLC creates one or more series, each with its own assets and members, established under the parent LLC. This structure is used to isolate risk across business lines or assets and is available only in certain states.

• Foreign LLC: A foreign LLC does business in a state other than where it was formed. This isn’t a different legal entity, but rather a compliance status required when a company operates across state lines.

• Tax election: LLCs can choose to be taxed as an S corporation (S corp) or a C corporation (C corp) while remaining an LLC under state law. This option is often used to manage tax exposure as profits grow.

What are the differences between member-managed and manager-managed LLCs?

Who manages an LLC has huge implications for the business. Deciding how to fill that role involves considering how to apportion decision-making power, as well as where responsibility should fall.

Here are the main differences:

• Overall control: In a member-managed LLC, all the owners are responsible for running the business. They can enter contracts, hire employees, and otherwise act on the business’s behalf. In a manager-managed LLC, only the appointed manager or managers are authorized to make these decisions.

• Authority in special cases: The operating agreement determines which decisions require member approval and which can be handled by managers or managing members. In either model, major actions such as amending the agreement, admitting new members, and dissolving the company typically require formal member consent.

• Day-to-day involvement: Member-managed LLCs treat the owners as operators, similar to partners in a partnership. With manager-managed LLCs, owners might not be involved in daily decisions.

• Decision-making processes: Member-managed structures make most decisions collaboratively, which tends to work well when the ownership group is small. If there are many owners or fast, centralized decision-making is important, a manager-managed structure might be a better fit.

• Fiduciary responsibilities: In a manager-managed LLC, managers owe duties of care and loyalty similar to those that apply to corporate officers. In a member-managed LLC, these duties apply to all members.

What are the benefits and drawbacks of LLCs for small businesses?

In general, the LLC structure strikes a balance between protection and flexibility. That balance comes with advantages as well as trade-offs.

Here are some benefits:

• Personal risk containment: The LLC structure creates a legal boundary between the business and its owners. Generally, individual members aren’t personally responsible for the company’s debts or legal claims.

• Early-stage simplicity: Starting an LLC requires fewer formal processes than starting a corporation. LLCs are also typically cheaper to form and maintain.

• Pass-through taxation: LLC profits and losses flow directly to the owners’ personal tax returns by default. This keeps tax reporting relatively straightforward and avoids entity-level federal income tax.

• Flexible management: An LLC’s structure allows the owners to design governance around how the business runs. Founders can share control evenly, centralize authority, or adjust things as the company develops.

• Custom economic arrangements: LLCs can allocate profits and losses in ways that reflect all kinds of contributions, such as time, capital, and expertise. To give one example, profits and losses can be distributed according to effort level or original investment amount, rather than strictly by ownership percentage.

• Credibility without rigidity: LLCs typically require fewer formal meetings, filings, and governance documents than corporations do. Operating as an LLC signals that the business is formally organized and serious, without imposing the heavy logistical framework of a corporation.

And here are some drawbacks:

• Self-employment tax exposure: Members of an LLC usually owe self-employment taxes. This can increase tax liability compared to corporate structures unless a different tax election is made.

• Capital-raising limitations: LLCs are often less compatible with institutional investment and complex equity structures. This can make fundraising more difficult or require a later conversion to a corporation.

• State-level costs and rules: Many states impose annual fees, franchise taxes, or reporting requirements on LLCs. These costs vary widely and can add up over time.

• Continuity considerations: Ownership changes can create disruption for LLCs. Operating agreements should plan for exits, transfers, and succession.

How to choose the right LLC structure for your business

Choosing an LLC structure requires thinking about how your business operates and which options are available in your state. The right setup balances control, risk, tax treatment, and flexibility.

Here’s what to consider:

• Number of owners: A single-member LLC works well for solo founders who want full control along with liability protection. A multimember LLC requires more planning but supports shared ownership and collaboration.

• Owner involvement: If all owners plan to actively run the business, a member-managed structure enables collective decision-making. If some owners are passive or you prefer centralized leadership, a manager-managed model is likely more suitable.

• Capital contributions: LLCs permit flexible valuation of the money, labor, and assets contributed by members. They’re useful when founders contribute different things and want the business’s economics to reflect that.

• Regulatory constraints: Certain professions and industries have requirements regarding LLC ownership and entity types. This can limit which LLC variants are allowed or mandate special formations.

• Administrative tolerance: LLCs typically have fewer formal requirements than corporations, but they still must meet state obligations regarding annual reports, franchise taxes, and registered agents. All owners should be prepared to maintain accurate records and keep business and personal finances separate to preserve liability protection.

• Tax strategy: Pass-through taxation (the default for LLCs) is simple but not always optimal. Some LLCs elect S corp or C corp tax treatment to manage self-employment taxes or reinvest profits more efficiently.

• Geographic reach: The structure should account for where the business will legally and physically operate. If your business operates in multiple states, that will introduce additional compliance requirements.

• Exit and transition planning: Consider what will happen if a member leaves, sells their interest, or dies. A well-structured operating agreement preserves continuity.

• Growth expectations: If the business is likely to stay closely held, an LLC can scale comfortably for a long time. If raising institutional capital is a near-term goal, it’s a good idea to structure your LLC with an eventual conversion in mind.

How Stripe Atlas can help

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