LLLP Vs LLC: Everything You Need to Know
LLLP vs LLC are two different business entity types, limited liability limited partnership (LLLP) and limited liability company (LLC), that both offer liability protection for business owners. 3 min read
LLLP and LLC Basics
Both of these entity types are somewhat new to the business scene in the United States. Owners of these business structures are afforded liability protection in the case that the company runs into legal or financial trouble. Company debts or the negligence of another owner cannot endanger the personal assets of other members.
LLLPs and LLCs are both offered as structure options for business owners in many states. These are great for those who want to benefit from pass-through taxation practices and avoid the potential for double taxation that comes with a corporate structure.
LLLP and LLC Differences
When choosing between an LLLP or LLC structure, you'll need to consider the long-term goals of your business. Ownership styles also plan a huge role in the structural decision of the company.
A limited liability limited partnership (LLLP) has a general partner and a limited partner. While the general partner is responsible for the daily operations of the business, the limited partner has a more hands-off approach. The limited partners are sometimes called silent partners, and they are basically just a part of the business on a investment or financial level.
LLCs can choose to have differing classes of members with some acting as managing members and others acting like the silent partners in an LLLP. More commonly LLCs are run as member-managed LLCs, where all of the owners take part in the day-to-day business tasks and running of the company.
Arguably, the biggest difference between LLLPs and LLCs is the fact that LLLPs are required to choose managing partners to be held personally liable for the actions of the LLLPs. On the other hand, none of the members of an LLC are held liable for the business's actions. Not all of the partners in an LLLP will be liable, but at least one must be. The silent partners in an LLLP are not usually liable, but that can change if they begin to act as managers in the business.
Usually, LLLPs come in the form of professional businesses. Common types include:
- Law firms
- Medical practices
- Real estate ventures
LLLP and LLC Taxation
LLLPs and LLCs are both treated as pass-through tax entities by the Internal Revenue Service (IRS). This means that the businesses are not expected to pay income taxes, but the owners are. The income, profits, and losses of the company pass through to its owners. Each owner is responsible for a certain percentage of the business income, which should be clearly outlined in the company's operating agreement.
Once the LLLP or LLC income has passed to the owners (partners or members) of the business, those individuals will be required to report that income on their personal income tax returns. Other business entity types, like corporations, are taxed both at the business income level and the individual owner (shareholder) level, which is called double taxation.
Many small business owners choose to form LLCs. Among the most common types of businesses that form as LLCs are family-owned business and middle-level companies with multiple owners. Single-owner businesses usually form as sole proprietorships rather than LLCs.
Small businesses with more than one member are automatically structured as LLCs in most states.
LLCs enjoy flexibility in management structure, protection from liabilities for owners, and choice of their preferred taxation status. They can choose to be taxed as a:
- Disregarded entity
LLLP or LLC?
When deciding whether the LLLP or LLC business structure is right for your business, you'll have some things to consider, but a big deciding factor is your location. Every state recognizes the LLC structure, but only 22 currently recognize LLLPs. If you try to form an LLLP in a state that does not recognize that form of business, you open yourself and any other owners up to liability.
Before making a decision, you'll want to research which business entity types are recognized in your state and the requirements for each.
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