Key Takeaways

  • LLPs require at least two partners; limited companies (LLCs) can be formed with just one person.
  • LLCs can issue shares and raise capital from investors, unlike LLPs.
  • Tax treatment differs: LLPs are taxed like partnerships, while LLCs may face corporate tax if elected.
  • LLPs are favored by professionals such as lawyers and accountants due to shared management and liability protections.
  • Differences in reporting requirements, investor appeal, continuity, and compliance make each structure more suitable for different business models.

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.

Key Characteristics of LLPs

  • Minimum of two partners: An LLP requires at least two partners to be valid.
  • Management structure: Responsibilities are typically shared equally, although a partnership agreement can delegate specific roles.
  • No shareholders or shares: LLPs do not issue shares, limiting their ability to raise equity capital.
  • Ideal for professionals: Common among law firms, medical practices, and accountancy firms where multiple partners manage operations.
  • Limited liability protection: Each partner is liable only for their own actions, not those of other 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.

Compliance and Filing Obligations

  • LLPs must file an annual confirmation statement and annual accounts with the state, similar to a limited company.
  • LLCs (Limited Companies) also need to maintain corporate records, file annual reports, and comply with more formalities such as shareholder meetings and board resolutions.
  • LLPs generally have fewer internal governance requirements and no requirement for a board of directors or formal shareholder resolutions.

Flexibility and Business Continuity

  • LLCs offer greater continuity, as they exist independently of their owners. The company continues to operate even if ownership changes.
  • LLPs may dissolve upon the withdrawal or death of a partner unless the partnership agreement provides otherwise.
  • LLCs provide flexibility in choosing a taxation method (pass-through or corporate), while LLPs are generally taxed as partnerships.

Investor Appeal and Capital Raising

  • Limited companies can issue shares and attract outside investment, making them more attractive to venture capitalists and angel investors.
  • LLPs are restricted from issuing shares and must rely on member contributions or debt for capital.

Regulatory and Licensing Considerations

  • Some states or professional bodies restrict who can form LLPs. For example, certain LLPs are limited to licensed professionals like lawyers or accountants.
  • Limited companies are more universally accepted and flexible in the types of business activities they can pursue.

Frequently Asked Questions

1. What is the main difference between a limited company and LLP? The key difference is that a limited company can have one owner and issue shares to raise capital, while an LLP requires at least two partners and cannot raise funds by selling shares.

2. Is an LLP better for professional services firms? Yes, LLPs are often used by licensed professionals like lawyers, doctors, and accountants due to their shared management structure and liability protections.

3. Can an LLP be converted to a limited company? Yes, an LLP can be converted to a limited company, but it involves formal procedures including re-registration and potential tax implications.

4. Do both LLPs and limited companies offer limited liability? Yes, both structures offer protection against personal liability for business debts, although the extent and form of this protection differ slightly.

5. Which is more suitable for seeking outside investment? A limited company is generally more suitable because it can issue shares and attract investors, unlike an LLP.

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