LLC vs LLP vs LP: Everything You Need to Know
An LLC vs LLP vs LP compares three different type of entities with individual business structures.3 min read
Updated October 30, 2020:
An LLC vs LLP vs LP compares three different type of entities with individual business structures. An LLC offers tax flexibility and operational efficiency. An LLP combines the advantages of an LLC with a limited partnership. An LP is best known as a business having silent partners.
About a Limited Liability Company (LLC)
Limited liability companies are a beneficial entity for single-owner businesses and small business owners. The owners are referred to as members. The LLC can consist of as few as one or two members.
One of the advantages of an LLC is the "limited" liability part, which provides personal protection to each member. For example, a member's personal assets are protected legally even if the LLC is dissolved or sued.
Forming a Limited Liability Company
Several steps are necessary to form and register an LLC. These generally include:
- A distinguishable name that is decidedly different from an existing business name that does not use restricted words.
- The LLC will have a set of Articles of Confederation, which includes name and contact information for each member.
- An operating agreement will outline each member's percentage of ownership if there is more than one member.
- Acquisition of the appropriate permits and licenses for the specific industry.
Benefits of an LLC
There are no federal business taxes with an LLC. This is due to the taxes being passed on to the LLC members.
- Each member of an LLC is protected from personal liability.
- The registration paperwork required to form an LLC is less than that of other business entities.
- An LLCs startup costs are lower than other types of business structures.
- There are fewer restrictions and more flexibility regarding an LLCs profit-sharing process.
Members of an LLC are considered self-employed. This means each member pays the higher self-employment tax that is based on the LLCs entire net income. In some states, the company is dissolved when a member leaves an LLC. The remaining members would need to form a new LLC to stay in business.
About a Limited Liability Partnership (LLP)
Unlike a limited liability company that has members, a limited liability partnership has partners who share in the company's ownership.
- Partners have management rights, tax benefits, and liability protection.
- Profit and Loss (P&L) is passed through to the partners as opposed to being taxed at the corporate level.
- In some states, there are restrictions on the types of businesses that can form an LLP.
Depending on what type of restrictions a state has in place, forming an LLC is a beneficial move for professionals working on their own or in firms such as accounting, engineering, legal, or medical. With an LLP, even if a partner incurs debts due to misconduct or negligence the individual professional is protected.
Formation of an LLP
Formation of an LLP is more involved than the formation process for an LLC. The formation process begins with the verification of qualification status if the LLP is being formed in a state with restrictions regarding an LLP. The rest of the formation process includes:
- A registered "doing business name" that is unique from other business names in the state or a personal name or names.
- A partnership agreement that outlines the assets and liabilities of each partner.
- An assigned registered agent who is authorized to conduct business in the state.
- A certificate of limited liability partnership with the names of the partners, the business location, and general contact information filed with the state.
- An Employer Identification Number (EIN).
- A state ID number issued by the state.
- Applicable permits and licenses allowing the business to operate legally.
- Required insurance.
- Publication of the formation in a local media source.
About a Limited Partnership (LP)
Limited partnerships have one general partner who has the responsibility for making management decisions and obligations. Other limited partners do not hold management or voting authority. Partners in an LP are liable only for the amount they've invested in the company. LPs are a positive move as a business structure when the goal is generating operating capital without giving up other rights and are a good choice for time-restricted projects.
An LP is formed following the same procedures as an LLP with the following exceptions:
- A limited partnership agreement is required versus a limited liability partnership agreement.
- The general partner usually serves as the registered agent.
- A certificate of limited partnership is required.
- Workers' compensation insurance may be required.
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