Limited Liability Partnership

A limited liability partnership (LLP) has two or more owners and offers limited personal liability for business obligations. This business structure is a common choice for licensed professionals such as doctors and attorneys. In some states, only certain professionals can form an LLP.

As a pass-through tax entity, an LLP requires its owners to report profits and losses on their individual tax returns. Income earned through an LLP is taxed at the self-employment rate of 15.3 percent. In some locations, you may be required to pay franchise or excise taxes.

An LLP can have any number of partners, but new partners can only be added at specific times and often with a buy-in.

LLP costs typically include:

  • $50 to $500 initial filing fee
  • Up to $820 annual fee
  • Up to $1,000 tax preparation fee

An LLP can have either a centralized or decentralized management structure but must hold annual meetings and submit minutes and annual filings. Members receive a Schedule K-1 that indicates the profits and losses that must be reported on the individual tax return.

When starting an LLP, you must demonstrate that all your members have the required licenses and qualifications as dictated by state law.

Limited Liability Company

The limited liability company (LLC) is popular for small businesses because this structure has few member (owner) restrictions, advantageous tax treatment, and simple set-up. This entity also commonly serves as a real estate holding company.

While an LLP is always subject to pass-through taxation, an LLC can choose to be taxed either as a pass-through entity, a standard corporation, or an S corporation.

Any income earned through an LLC is taxed at the self-employment rate of 15.3 percent. In some locations, you may be required to pay franchise or excise taxes.

An LLC can have any number of members, and new members can buy into the company at any time.

The average costs to start an LLC are as follows, but vary by state:

  • $50 to $500 initial filing fee
  • Up to $820 annual fee
  • Up to $1,000 tax preparation fee

Another advantage of an LLC is the ease of administration. Most states require only annual filings and do not require annual meetings or submission of minutes. Each LLC member receives a Schedule K-1 with his or her share of profits and losses, which are then reported on the individual tax return.

C and S Corporations

C corporations, also known as standard corporations, are generally used for larger companies. They can have unlimited shareholders and establish tiers of voting privileges. This makes a corporation ideal for businesses that plan to grow by seeking investors.

Small and medium-sized businesses can choose to establish an S corporation. This entity must have 100 or fewer shareholders. S corporations are taxed as pass-through entities, unlike C corporations which are taxed at both the individual and corporate levels.

Sole Proprietorships

A sole proprietor can operate independently in most states as long as he or she has the required licenses and permits for the business in question. Because you have not established a separate legal business entity, however, you are personally responsible for all business debts and obligations. Many sole proprietors opt for a structure that provides liability protection when their businesses grow.

Understanding Liability

Both LLPs and LLCs are desirable because of the personal liability protection they offer to owners. If the business is in debt or must pay a legal judgment, the personal assets of the owner cannot be seized. Some exceptions exist, such as when owners engage in daily business operations.

When the so-called corporate veil is pierced, liability protection may be void. This includes situations in which:

  • Fraud is committed against investors, vendors, or clients.
  • The company is administered improperly according to the state's LLC laws.
  • Business and personal funds are kept in the same accounts or otherwise commingled.
  • Company bills have been paid with personal funds.
  • The company did not possess sufficient capital at the time of formation.

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