LLC vs LLP: Everything You Need to Know
When comparing LLC vs. LLP business structures, it's important to choose the type of business that meets your needs. Both a limited liability partnership (LLP) and a limited liability company (LLC) combine the characteristics of a partnership and a corporation. 4 min read
When comparing LLC vs. LLP business structures, it's important to choose the type of business that meets your needs. Both a limited liability partnership (LLP) and a limited liability company (LLC) combine the characteristics of a partnership and a corporation. Choosing the right structure can have long-lasting repercussions on your business, so it's essential to consider your options.
LLC Versus LLP
Some states don't allow LLPs, which makes your choice easier. In states that do allow LLPs, it takes at least two to form the entity; an LLC only requires one person. If you establish a one-person LLC, you essentially have the same benefits of a sole proprietorship, where you alone are responsible for making decisions. If you share ownership with other members, each member has equal management power.
An LLC must have an operating agreement, which details how you make decisions, such as whether those decisions are made by vote or by delegating responsibilities. With an LLP, each owner maintains authority to:
- Conduct business
- Make important decisions
- Sign contracts.
You will, however, need to create a partnership agreement to decide how to run the business. For instance, you may select one partner to act as manager or opt to make decisions via a committee.
Benefits of an LLC
An LLC may have one owner or multiple owners. These owners are referred to as "members." Members may manage the business operations themselves or hire experienced managers.
LLCs also enjoy a lot of flexibility, such as:
- An unlimited number of members.
- The ability for corporations to be members.
- Freedom from management-reporting requirements.
- Pass-through taxation, where the business itself doesn't pay taxes, but its profits and losses are reported on members' tax returns.
- Separation of personal and legal liabilities and assets for members.
LLCs are required to report their earnings and revenues to the IRS each year using Form 1065. The IRS then uses this form to check each member's tax filing. LLCs must also register with their secretary of state.
Like partnerships, LLCs enjoy the ability to run business operations however the owners see fit. Regardless of his or her role in the business, every member is protected from:
- Business-related debts
- Other liabilities.
Benefits of an LLP
An LLP is a general partnership that requires at least two partners. There are many similarities LLPs share with LLCs, such as LLPs being a cross between a partnership and a corporation, where the owners enjoy certain liability protections.
Despite these similarities, there are some differences. Most professional businesses, such as doctor's offices, register as LLPs. An LLP must also have a managing partner who is liable for the partnership's actions. Any silent partners or investors who don't play a managerial role are completely protected from liability.
About 40 states currently allow LLP formations, but the laws vary by state. For example, your state may dictate which professions can form an LLP. Make sure to research your state's regulations before attempting to form an LLP.
Another thing to consider: If your company will operate in multiple states, check each state's statute to ensure it recognizes an LLP formed out of state.
Medical group practices and law firms commonly use the LLP business structure when establishing a new group of partners. Usually, a founding partner or a small group is in charge of running the practice or firm while silent partners take a back seat. Junior partners don't have much say in the business's direction, apart from their own personal practice. Therefore, they also enjoy liability protections that could be caused by a poor management decision.
Both LLCs and LLPs are required to file information tax returns, even though the IRS does not technically recognize them as business entities. An LLC may choose to file a corporate tax return, but if not, it's treated like a partnership by default. Under some circumstances, an LLC will file as a corporation. If an LLC has only one member, he or she must file self-employment taxes.
With an LLP, each partner must report his or her share of the profits and losses on a personal tax return. Similarly, each LLC member does the same. This is referred to as "pass-through" taxation because the business itself doesn't pay taxes. Instead, the profits "pass through" to partners and members who report the finances on individual tax returns.
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