Difference Between LLP and LLC: Everything You Need to Know
The difference between an LLP and LLC is an LLC is a limited liability company and an LLP is a limited liability partnership.3 min read updated on February 01, 2023
What Is the Difference Between LLP and LLC?
According to the government, specifically the IRS, an LLC is a business organization that is formed lawfully under the state by filing articles of organization. In an LLC, there are two ways to set up the company's management:
- The individual members can manage it directly.
- They can hire outside management that does not have any stake in the business.
Both LLCs and LLPs have similar abilities to limit the liability of each partner or member involved in the business. However, there are also some differences between the two entities. LLPs must have a managing partner who can bear the liability for the LLP's actions.
While all states allow LLCs to form, only about 40 states allow for the existence and formation of LLPs. Most LLPs are professional businesses, while LLCs can be businesses of all kinds.
What Is the Difference in Management Structures?
One of the biggest differences between an LLC and an LLP is how the entity is allowed to be managed. An LLC can be managed in two ways; the LLP is run similarly to a partnership. The business partners basically are equally responsible for managing the business.
What Is the Difference in Limited Liability Protection?
Both LLC and LLP businesses allow for limited liability for all members and partners. The protections are not equal under the two different entities. With an LLC, the individuals are all protected from personal liability for any debts or lawsuits filed against the business. Creditors and individuals who have been directly harmed by the business can't sue any of the business members for debts.
When it comes to an LLP, partners are personally liable, but only in so far as it applies to their own negligence. One partner will not be held responsible for the other's actions. This means each individual has liability protection from wrongs committed by the other partner. Liability only involves the partner's direct financial investment.
Personal liability for debts is allowed in some states when an LLP is developed.
What Is the Difference in Tax Benefits?
The IRS does not see LLCs or LLPs as businesses when it comes to taxation. This means they do not directly pay income taxes. However, tax documents must be created for the business and sent to the IRS.
The business earnings pass directly to the partners or the members, and each individual must report the earnings on their personal tax forms. Taking this into consideration, it is imperative to pick the business structure that offers the best protection and the fewest tax and legal consequences for its members.
LLCs and LLPs are considered “pass-through” businesses due to the way earnings move through the business to the members or partners. This allows them to avoid corporate taxes and pay personal income taxes instead. If corporate taxes were charged, this would cause a double taxation issue in which taxes must be paid on the earnings twice.
Formations and Operation
There are not many differences in the way you form an LLP and an LLC.
State laws do dictate who is and is not allowed to form an LLC and an LLP. Typically, a single person can form an LLC, and that individual can be a business person or anyone else. With an LLP, the organization is limited to people who are licensed professionals in their distinctive fields.
While it might seem like there are few differences between LLCs and LLPs, there are some things to note. Only an LLP will provide protection from a partner's wrongdoing, and the business is typically a professional one.
When it comes to an LLC, you can expect more widespread protection when it comes to liability. The liability will be limited, but you will not be fully protected from the actions of the other members, like in an LLP. While the protections are available, LLP members might still need to pay back business debts that cannot be paid back to creditors due to a failing business.
The Bottom Line
In general, LLCs and LLPs combine many of the advantages and disadvantages of partnerships, sole proprietorships, and corporations. Consider the benefits and drawbacks of each entity to decide which is best for your business structure.
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