Limited Liability Partnership vs. Limited Company
If you're considering limited liability partnership vs limited company, a limited company can be formed with just one member, while an LLP requires more.4 min read updated on February 01, 2023
If you're considering limited liability partnership vs limited company, the major difference lies in the fact that you can form a limited company with just one member, while an LLP requires at least two members. Moreover, unlike a limited company, a limited liability partnership cannot raise capital from external sources. Many states have legislation in place to allow forming a limited liability company as well as a limited liability partnership.
What Is an LLC?
An LLC or a limited liability company protects you against the business liability of the company just like a corporation, while retaining the taxation and structural benefits of a partnership firm.
Owners of an LLC are called its members. They can either choose to manage the company operations on their own or appoint a professional manager. An LLC also has a lot of flexibility. For example, you can have any number of members, and even corporations can be members of an LLC. Unlike corporations, LLCs usually are not subject to state-level reporting requirements.
LLCs do not pay taxes at the company level. Just like in the case of a partnership firm, profits and losses of an LLC pass through to the individual tax returns of its members. Thus, there is no double taxation, which corporations are subject to. Moreover, LLC members can also receive some tax relief if the company does not perform well. They can adjust the company losses against their personal income.
An LLC is an ideal structure for many small and mid-sized businesses. In many states, businesses with more than one owner are required to form an LLC. Compared to general partnerships, LLCs legally separate the business assets and liabilities from those of the owners. LLCs must file an annual return of their earnings to the Internal Revenue Service (IRS) in Form 1065. The IRS uses this information to ensure that the members report their share of business income in their personal tax returns.
The IRS does not classify LLCs as a separate tax-filing entity, unless an LLC elects to be treated as a corporation. An LLC that does not elect for the corporation status is treated as a sole proprietorship or a partnership business, depending upon whether it has one or more members. Reporting your income as a partnership business is more beneficial since it allows for pass-through taxation and lets you avoid double taxation.
LLCs must register themselves with the Secretary of State. The owners of an LLC are protected against the financial liabilities of the company, irrespective of their participation or role in the management of the company.
What Is an LLP?
An LLP or a limited liability partnership, as the name suggests, is a partnership business with the benefit of limited liability protection.
Tax treatment of an LLP is similar to that of an LLC. However, an LLP cannot have a corporation as its member. An LLP must have a managing partner who can be held liable for its business actions. The person in charge of an LLP is legally accountable for its actions just like the owners of a general partnership business. However, silent partners of an LLP enjoy the liability protection if they do not participate in managerial functions.
Professionals usually choose the LLP structure. It's especially popular among legal and medical practitioners. One or more founding partners run the firm, while others stay on as silent partners. The firm can choose to bring in more partners at a later point of time. Since the junior partners do not have a real say in the management of the firm, the LLP structure protects them from problems that may arise from the management's decisions. Managing partners generally have a much larger share in the LLP than the silent partners.
Essential Differences Between a Limited Company and an LLP
While these two business structures have some similarities, they also have some clear differences, especially when it comes to liability exposure.
- You can form a limited company with just one member, while an LLP requires at least two members.
- The members of a limited liability company are liable to the extent of the unpaid amount of shares, whereas the LLP members are liable to pay the amount of agreed contribution in the event of winding up.
- A limited liability company can raise loans and capital from outsiders, but an LLP can only take loans from outside investors.
- A limited liability company is subject to corporation tax, while LLP members are taxed individually.
- Alteration in capital structure and ownership is much easier in case of a limited company than an LLP.
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