When you’re about to start a small business with more than one owner, a concern may arise in your mind about your personal liability risks.
If the situation is precisely the same, then this article is the right one for you because we will compare LLC vs. LLP’s business structure.
Limited liability Company (LLC) and limited liability Partnership (LLP) has some aspects of general corporation and partnerships.
They both provide a sense of security regarding liability to the owners/members while offering some simplicity of Operating and managing the general partnership.
Though they have some standard vital features and some differences, they are also essential for an entrepreneur to assess when opting for an ideal business entity.
In this article, we’ll dig into some key similarities and differences between the LLC vs LLP.
Do remember that the business structure you are going for will have short and long term effects at the same time.
Let’s discuss it with all the pros and cons.
What Is an LLC?
A limited liability company is a combination of characteristics of both partnerships and corporations.
It offers protection to the company from legal action and creditors with a pass-through tax structure that a corporation enjoys.
The LLC business owners are known as members who are like the corporation owners known as stockholders. The members of an LLC can be any other business entity or a natural person.
Some companies like corporations and other LLCs can take over LLCs. There is no limitation on the ownership of an LLC business.
The management of an LLC is quite flexible as they can choose between a member-managed or a manager-managed LLC, and they don’t have to do reporting and regular meetings as done in corporations.
Advantages of LLC:
- Only one member.
- Can conduct any business, though some states don’t allow professionals to form an LLC.
- More liability protection than LLP.
- Tax advantages, known as “pass-through” taxation, in which members don’t get taxed for the LLC business but pay the LLC tax on their personal income tax return.
- Provides Limited liability protection for the members to avoid using their personal assets to pay the LLC debts.
- Corporate and other LLC members.
- Simple filing requirements.
- Flexibility in taxation because an LLC can choose to file taxes as an S corporation.
Disadvantages of LLC:
- In many states, professionals aren’t allowed to form an LLC.
- LLCs must file annual reports with the state.
- A member must include the profits of an LLC in their personal taxes.
- LLCs can have operating costs more than LLPs.
Learn How to start a LLC
What Is an LLP?
Limited Liability Partnership (LLP) has a limited number of partners; limited partners and general partners.
Usually, General partners act as managers for the LLP business and manage the day-to-day tasks, whereas limited partners are limited to finance only.
As general partners are more linked to the company and handle many essential matters. And they are also held liable for all obligations that an LLP can have, like any legal issues, debts, contracts, and more.
On the other hand, Limited partners enjoy the privilege of limited liability afforded by all LLC members.
These partners are also known as silent partners as they are not responsible for the business’s activities.
If the case of bankruptcy or any other financial problem occurs, they are only responsible for their capital contributions
If a silent partner wants to take part in the company’s management, they will forfeit the liability protection.
Advantages of LLP:
- Two or more partners who want to run a business as a partnership.
- The Partners belong to the same profession.
- Each partner can manage the business if they wish to.
- It protects partners from the negligence of other partners.
5. Old Partners can leave the business, and new partners can join. It depends upon what is in the partnership agreement.
6. Pass-through taxation.
Disadvantages of LLP:
- Don’t exist in every state.
- Not eligible to file tax as an S Corporation.
- LLPs must have at least two partners.
- Usually, LLPs only allow certain professions.
- LLP business must have a managing partner to manage the business activities, but all partners can help in the business’s smooth running.
- Filing requirements are more complicated in the case of LLPs as compared to LLCs.
- It has more exposure to liability in an LLP than it is in LLC.
LLC Vs. LLP: Key Differences
Now it’s time to discuss the critical differences between LLC vs LLP and determine which is the ideal match as per your requirements.
Both LLC and LLP offer the same protection against personal liability by reducing each partner or member’s liability amount up to their investment in the business.
In general, an LLC provides more liability protection as compared to an LLP.
But exceptions are always there. In business management, the members are not responsible if the LC gets sued by any party or owns someone’s debt.
This provision helps protect the members’ personal assets like their houses, bank accounts, and other property.
After completing an LLP formation, the partners have limited liability, but it will directly depend on the state where you are incorporating your LLP.
In some States, the LLP business only protects from being responsible for other partner’s negligence, but partners are held personally responsible for the business’s general obligations and debts.
In some states, LLPs have to appoint at least one partner with unlimited personal liabilities, whereas other partners are protected.
Taxation of LLCs and LLPs
An LLC always has the option to be taxed as a sole proprietorship, corporation, or partnership. On the contrary, an LLP must file themselves as a partnership.
If they file as a sole proprietorship or partnership, it will directly indicate that the income has passed through the business, and the income of the individual is the tax for once only.
And if filed as a corporation, then the business has first to pay tax as a corporate tax return, and on the second time, the same income gets taxed as a personal tax return.
Additionally, both LLC and LLP can benefit from a 20% pass-through deduction, which means you can deduct your business profits up to 20% from your tax return.
Management Structure: Operating Agreement vs. Partnership Agreement
Another critical difference between an LLC and an LLP is their management structures. An LLC needs to have only one member and an LLP to have at least two partners.
The management of an LLC works according to the operating agreement created by the members.
This agreement outlines each member’s financial investments, distribution of profits, and who will be responsible for the management’s decisions.
An LLC has the choice to run a business as a member-managed LLC where all the owners can participate.
And they also have one more choice of opting as manager-managed LLC in which investors and passive owners don’t take part in the company’s decision-making process.
Coming to the LLP, the management structure is identified by the partnership agreement, which defines the detailed role of each partner’s profit distribution and the financial contributions made by each of them.
In this agreement, you have to mention one partner as a silent partner who will receive a share in profits but won’t be a part of the company’s decision-making authority.
The Last Words
You can choose the form of a business entity, LLC or LLP, depending on the state and the profession you are involved in.
If you are a professional who requires a license to run a business, you can go for LLP if your state permits you.
And if not, then LC is the best fit for you. But first, do your work of checking with the state that they allow the LLP or LLC.
And if you want more liability protection, then without any doubt, go for LLC.
So this is it for this article. We have discussed what LLC and LLP are with their pros and cons.
The primary difference between them is that whenever you want to start a business with your partner’s, you can always refer to these points for your R&D.