When it comes to LLC vs. LLP there are a few key differences. Although both are granted limited liability protection and don’t directly pay income taxes, the differences lie in management requirements, liability protections, liability insurance obligations, and tax benefits.
As requirements vary from state to state, it’s impossible to give a catchall summary of what these differences entail, so researching through your local enterprise office is the best way to understand the differences between LLCs vs. LLPs.
Because rules vary widely, especially for LLPs, it’s important to research specific rules in your state. Here’s what you need to know about LLCs and LLPs as a business owner.
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What is an LLC?
A limited liability company is a legal management structure that is created to operate a business. Owners of an LLC, who are called members, are afforded personal liability protection, which means that their personal assets cannot be involved in the business’s litigation or debt collection.
Single-member LLCs can choose from:
Multi-member LLCs can choose from:
- S corporation
- C corporation
What is an LLP?
A limited liability partnership is a business entity type that affords personal liability protection to business partners.
Professional businesses—such as law firms, accounting firms, or medical offices—often form as LLPs. State rules frequently restrict LLPs to professions that are licensed, including doctors, dentists, accountants, and lawyers, but state laws vary widely when it comes to LLPs.
Be sure to check with state officials, typically in the secretary of state’s office, to determine the rules where you operate.
LLC vs. LLP differences
LLCs and LLPs have basic similarities, but they’re not synonymous.LLC vs LLP
|Formation||Suitable for single or multi-owner.||Only for multi-owner businesses.|
|Management||Member-managed or manager-managed.||Managed by partners.|
|Ownership||Can be owned by individuals, entities, foreigners.||Owned by licensed professionals.|
|Taxation||Pass-through but can opt for corporation.||Default as pass-through entity.|
|Liability Protection||Limited personal liability; exceptions apply.||Limited personal liability; shields from partners.|
|Existence||Generally perpetual.||Duration defined, may need renewal.|
The LLC structure is available to single-owner businesses and multi-owner businesses, but the LLP is not available to single-owners. (It’s called a partnership, after all).
Both LLCs and LLPs are legal entities. LLC’s can be managed by members (member-managed) or by managers appointed by the members (manager-managed). LLP’s are managed by the partners, although some may take on more managerial roles than others.
Both require a legal agreement to spell out the details of the business’s operation—from the responsibilities of the owners to how money will be distributed and decisions made. For an LLC, this document is called the operating agreement. For LLPs, it’s called the partnership agreement.
LLCs offer a wide range of flexibility in terms of who can own and how ownership and voting rights are determined. For example, an LLC can be owned by individuals, corporations, trusts, or foreign entities.
In general, LLPs are more rigid. In many states, LLPs can only be formed by licensed professionals in specific industries. Lawyers, accountants, doctors, and architects use them a lot.
LLPs and LLCs are automatically considered pass-through entities by the Internal Revenue Service (IRS). For the purpose of federal income taxes, any profit and losses “pass through” the business to the owners, and must be reported on the LLC member or LLP partner’s personal income tax returns.
LLCs have more options than LLPs when it comes to taxation. LLCs can elect to be taxed as a corporation—usually an S corporation. In an LLC without an S election (like a general partnership), members pay self-employment taxes on their portion of the LLC’s total earnings.
As an S corporation, owners can elect to be paid a salary on payroll and pay Social Security and Medicare taxes only on that salary. The rest of the business’s profits are not subject to self-employment tax.
LLC members and LLP partners can’t typically be held personally liable for the failings of the business.
In many states, partners in an LLP are shielded from liability if another partner faces a malpractice claim. In LLCs, members may be held liable for other members’ malfeasance or wrongdoing. Generally, however, the LLC will insulate a member from personal liability when an employee or other member causes harm without the knowledge or direction from that member.
The majority of states in the US allow LLCs to have a perpetual existence, meaning they can keep going indefinitely. The duration of an LLP can be set for a specific number of years, after which it must either be renewed or dissolved.
LLC or LLP: Which is best for you?
If you’re thinking of starting a business with a partner (or many partners), the right legal and management structure can reduce your tax burden and protect your personal finances.
Here’s what to consider to make an informed decision about your type of corporation.
- Nature of your business: For professional services (like law or accounting), consider an LLP. For a general small business, go with an LLC.
- Ownership: Single owners need an LLC, multiple owners can choose either.
- Tax implications: LLPs only offer pass through taxation. If you want more tax options, lean toward an LLC.
- Consult a professional: Get insights from a lawyer and accountant for tax implications.
Once you’ve decided, you’re ready to go! If you’re not interested in forming an LLP, learn how to start your LLC today.
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Differences between LLC vs. LLP FAQ
What is better LLP or LLC?
Why would you choose an LLP over an LLC?
The key advantage of an LLP over an LLC is that, with an LLP, each partner’s personal assets are protected from debts, obligations, and liabilities of the business. This means that if something goes wrong with the business, the personal assets of each partner are protected. Additionally, LLPs are more attractive to investors due to the increased liability protection. Furthermore, LLPs typically are simpler to administer than corporations.
What is the main difference between an LLP and an LLC?
In contrast to LLPs, LLCs offer more management flexibility and tax options. Always consult with legal and tax professionals to determine the best entity for your specific circumstances.
What is the downside of an LLP?
This can leave members exposed to potential personal financial losses and is a major consideration when deciding whether or not to form an LLP. Additionally, LLPs are subject to more stringent regulations than other business structures, such as sole proprietorships or corporations, which can increase administrative costs.