Understanding the difference between an LLC and LLP business structure is a vital step in forming your new business. It's important to determine which business structure you would like to adopt before incorporating in your state of operation.

What Is an LLC?

An LLC, or limited liability company, is a partially separate legal entity from its owners. This business structure provides a combination of the limited liability protection a corporate business structure offers and the tax benefits associated with a partnership. For this reason, an LLC structure is highly popular among small business owners. The Internal Revenue Service defines a limited liability company as "an entity formed under state law by filing articles of organization."

In an LLC business structure, member liability is limited, providing a measure of flexibility in terms of company management and issues related to business taxes. Any combination of individuals, corporations, and even other LLCs can own an LLC. Not every company can be formed as an LLC, however. Certain businesses, such as banks and insurance agencies, are not allowed to form as LLCs under most state laws.

In some states, such as California and Nevada, licensed professionals are prohibited from forming an LLC. Prohibited businesses in these states include:

  • Accountants
  • Architects
  • Attorneys
  • Physicians

These licensed professionals might still benefit from the protection of an LLC, however, by forming a PLLC, or professional limited liability company. The exception to this is in California, which does not allow the formation of PLLCs.

What Is an LLP?

A general partnership, or LLP, is formed when two or more owners, or partners, incorporate a business together. The definition of an LLP is similar to that of an LLC. In essence, an LLP is a hybrid of the corporate and partnership business structures. The Internal Revenue Service defines an LLP as being "formed under a state limited liability partnership law." In this type of business structure, partners are not held liable for any other partner's debts or actions.

In most cases, companies choose to organize under the LLP business structure. However, an LLP is required to have a managing partner who is responsible for the acts of the partnership as a whole. Partners or investors who don't take on managerial responsibilities are known as "silent partners" and receive limited liability protection.

Approximately 40 states allow LLC formation. Specific laws applying to this structure, however, vary from state to state. Some states place a limit on the types of businesses allowed to form an LLP, so it's important to check local regulations. If you plan to do business in more than one state, you'll need to check regulations in each state you intend to operate in to make sure they recognize LLPs formed in a different state.

Common Types of LLPs

Most LLPs are comprised of a professional business of some sort. For example, law firms and medical practices can choose to form as LLPs if a founding partner or partners are actively involved in running the business. Other partners might be silent or might have been brought into the partnership at a later date.

These junior partners don't typically have much say in regard to the direction of the business. However, the LLP does offer them protection from issues that might arise from bad management decisions. Managing partners typically have a larger share of ownership in the business than junior or silent partners do.

Common Types of LLCs

Many business types choose to adopt the LLC structure. In most states, any business with more than one owner is required to form as an LLC. This makes the LLC structure ideal for small to midsize businesses that have more than one owner. Unlike a simple partnership, an LLC provides the benefit of liability protection by placing a degree of separation between the personal assets and liabilities of the owners and the company itself.

This type of business, however, must report income and revenue to the IRS once a year by filing a Form 1065. LLCs are also required to register with the Secretary of State in any state they operate in, unlike a simple partnership.

If you need help with the difference between LLC and LLP, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.