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.4 min read
What is the difference between an 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 in terms of the way it is managed. The individual members are able to manage it directly or they can hire outside managed to do so who do 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 actions taken by the LLP.
While all states allow LLCs to form, only about 40 states allow for the existence and formation of LLPs.
What Is the Difference in Management Structures?
One of the biggest differences between and LLC and an LLP is how the entity is allowed to be managed. LLC can be managed in two different ways; the LLP is run very similarly as a partnership. The partners in the business basically are responsible equally 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 from any debts or lawsuits filed against the business. Creditors and individuals who have been directly harmed by the business are unable to sue any of the members of the business for debts.
When it comes to an LLP, partners are personally liable, but only in so far as it applies to their own specific negligence. One partner will not be held responsible for the other’s actions. This means that each individual has liability protection from wrongs committed by the other partner. Liability only involves the direct financial investment of the partner.
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 are businesses when it comes to taxations. This means that they do not directly pay income taxes. However, tax documents need to be created for the business and sent to the IRS.
The earnings from the business are passed directly on to the partners or the members, and each individual will need to report the earnings on their personal tax forms. When this is taken into consideration, it is imperative to pick the business structure that offers the best protection and the fewest tax and legal consequences for the members of the business entity.
LLCs and LLPs are considered “pass-through” business due to the way that earnings are moved through the business and then provided to the members or partners. This allows them to avoid corporate taxes so that personal income taxes can be paid and filed instead. If corporate taxes were charged, then this would cause a double taxation issue where taxes must be paid on the earnings two times.
Formations and Operation
There are not many difference in the way an LLP and an LLC is formed.
State laws do dictate who is and is not allowed to form an LLC and an LLP. Typically, a single person can state an LLC, and the 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 field.
While it may seem that there are few differences between an LLC and an LLP, there are some things to note. Only an LLP will provide protection from the wrongdoing of a partner, and the business is typically a professional one.
When it comes to an LLC, you can expect a 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, members of an LLP may still need to pay back some of the business debts that cannot be paid back to creditors due to a failing business.
The Bottom Line
In general, LLCs and LLPs mix together a lot of the advantages and disadvantages of partnerships, sole proprietorships, and corporations. It is wise to look directly at the various benefits and drawbacks of each entity to decide which is best for your business structure.
If you need help starting an LLC or 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, Stripe, and Twilio.