Congratulations on your new business! You wouldn’t be reading this article if you weren’t paralyzed between choosing an LLP and an LLC. Either one is a good and valid choice provided it achieves your business goals, and you know the difference between them–that’s not always clear. So, today I’m going to explain the difference between both agreements in the simplest way possible so that you can get this paperwork out of the way and start your business. Only you can decide the right business structure for you, my job is only to give you the information you need to make an informed choice.
What is an LLC?
An LLC, or Limited Liability Company, is a separate legal entity from its owner. Having an LLC creates a barrier between you and your company because business predictors can’t confiscate your personal assets–they can only take the LLC’s assets instead. For that reason, LLCs are a mix between a partnership and a corporation.
LLCs provide the same legal protection as corporations, with lower fees and less paperwork, and you can form them with multiple partners who’ll partially own the company.
What is an LLP?
An LLP, Limited Liability Partnership, is a business structure with multiple partners where each one receives some legal protection from the other partner’s liabilities. An LLP agreement needs at least 2 partners, and you can write the partnership’s specifics in the formal agreement.
The benefit of LLPs is that it prevents unlimited liability for business obligations and the other partner(s)’s actions. You can’t form LLPs in some states like California, which prohibits LLP formation for most professionals. LLPs are less common than LLCs for that reason.
What’s the difference between an LLC and LLP?
Basically, an LLP’s owners are ‘partners’, while the LLC’s owners are ‘members’. The difference is how the limited liability aspects are recognized in each structure and how each is managed and taxed.
1. Limited Liability Protection
An LLC owner’s liability for business debts is limited to what they’ve invested into the business unless they’ve signed a personal guarantee of debt. One LLC owner is also not liable for the misconduct or negligence of their co-owners. An LLC owner’s liability is their own actions and investment.
Liability is more complicated for LLP owners. In some states, LLP owners receive the same protection as LLC ones. In some states, the partners aren’t liable for each other but are liable for the business in general. Other states even require LLPs to designate a fully liable general partner while the other partners receive limited liability.
2. Management of LLC and LLP
LLC owners are legal ‘members’, and LLCs can be either member-managed or member-owned. So, you can have an LLC where the owners are involved in the management or one where they hire professional managers. LLC operating agreements outline each member’s rights and responsibilities, and there are many different ways to structure management in an LLC.
An LLP’s owners are legal ‘partners’. LLPs also have every partner’s rights, duties, and profit percentage outlined in the partnership agreement. You can designate a partner as a ‘silent partner’, meaning someone who receives profits but does not manage the business, in an LLP.
3. Taxes of LLP and LLC
LLCs can be sole proprietorships, partnerships, or either a C or S corporation, and they’re taxed accordingly. An LLC is responsible for reporting its revenue and profits to the IRS and paying taxes according to its structure.
LLPs are only taxed as partnerships. As a partnership, an LLP does not itself pay taxes. Instead, the profits from the LLP are reflected in each partner’s personal income, and they pay personal income taxes.
You may experience additional taxes depending on which state you reside in.
What are the advantages and disadvantages of LLCs and LLPs?
Both agreements have advantages and disadvantages.
Limited Liability Company (LLC)
- A single person can form an LLC.
- The owner(s) personal assets are saved from business debts.
- The owner’s personal information is private.
- LLCs are flexible in how they’re taxed.
- Only one member is required for the formation.
- LLCs may need annual fees and paperwork.
Limited Liability Partnership (LLP)
- Each partner is protected from the other’s actions.
- LLPs have flexible management structures
- LLPs are easier to form.
- LLP formation is sometimes restricted to certain professions.
Should I get an LLP or an LLC?
The right business structure for you depends on your goals and priorities. Each structure has its pros and cons, so weigh them against your goals, and choose the structure that gives you the most value. Also, it’s both time-consuming and costly to change business structures so carefully choose which one you want.
First, check your state’s laws for both LLP and LLC formation. You may not be able to form one or the other business structure if your state forbids it. Remember, not all states permit either LLP or LLC formation, and some states that allow LLP formation restrict it to certain professions.
Assuming you can form either structure, an LLC is the better choice if your priority is limiting liability, especially tax liability. An LLC is also your only choice if you don’t have any business partners. An LLP is the better choice if your state has lower taxes on LLCs and your profession or industry means limited partner liability is important.
To summarize, LLCs are separate business entities while LLPs are not. LLC owners aren’t personally responsible for their business’s debts, and LLP owners aren’t responsible for their partner(s)’s liabilities. Both business structures have their own pros and cons, and not all states let you form either one. You should choose your business structure based on your business goals and the type of liability you want to minimize: business debts or partner(s)’s liabilities.