LLP or LLC Which Is Better: Everything You Need to Know
LLP or LLC, which is better? Whether a limited liability partnership (LLP) or limited liability company (LLC) is a better fit for your company depends on your vision, business type, and ownership structure.3 min read
LLP or LLC, which is better? Whether a limited liability partnership (LLP) or limited liability company (LLC) is a better fit for your company depends on your vision, business type, and ownership structure. It is important to understand the advantages and disadvantages of each to make sure that you choose the best structure for your particular needs.
Business Structure Basics
Any business owner or hopeful entrepreneur has likely seen many of the business types including:
- Limited liability company (LLC)
- Limited liability partnership (LLP)
- Limited partnership (LP)
- C corporation (C corp)
- S corporation (S corp)
There are many types available to business owners today, but before the 2000s, you only had a choice between partnerships or corporations. LLCs and LLPs have recently surpassed corporations as the most popular business structures for new companies. Many business owners are attracted to the flexible management structure, liability protection, and avoidance of double taxation that LLCs and LLPs offer.
LLP and LLC Similarities
LLPs and LLCs fall under the partnership classification with the Internal Revenue Service (IRS), but can elect other classifications if they so desire. Some find it beneficial to actually bring these two entity types together by having an LLC act as one of the partners of an LLP, which can offer further liability protection for the owners of the LLP.
What Is an LLC?
Limited liability companies combine some of the most appealing characteristics of corporations and partnerships, offering the protection from legal action and creditors that corporations enjoy with the pass-through tax structure that partnerships use.
The owners of an LLC are called its members, much like the owners of a corporation are known as stockholders. Members of an LLC can be individuals or other business entities. Companies like corporations and other LLCs can own LLCs. There are basically no limitations placed on the ownership of an LLC.
LLC management is pretty flexible. They can choose to be member-managed or manager-managed, plus they don't require as much reporting and regular meetings as corporations.
Profit distribution percentages are also flexible within the LLC structure, because the allocations to members do not have to be proportional to their initial contributions to the business. If a member of the LLC had a lower capital contribution but performs more management duties, he could have a higher profit allocation than a member who had a higher contribution.
Every state in the country recognizes LLCs as legal business structures and allow single-owner LLCs. Some states have different tax laws for LLCs, so you'll want to check your Secretary of State website to see the requirements and regulations for various entity types. Sole proprietorships are able to switch to LLC structures without any changes to their taxation.
What Is an LLP?
Limited liability partnership (LLPs) are made up of general and limited partners and may have only one of each or multiples. General partners act as managers for the business and handle the day-to-day tasks, while limited partners are involved only on a financial level.
Because general partners are more closely tied to the company and handle many decisions, they are held liable for any obligations that the LLP might have, including debts, contracts, and any legal issues.
Limited partners enjoy the limited liability that is afforded to all members of an LLC. These types of investors are also called silent partners. They are not held liable for the actions of the business and, in the case of bankruptcy or other problems, can only be held responsible for their capital contributions. If a silent partner later decides to take on some of the management tasks of the business, he or she will forfeit liability protection.
Both general and limited partners reap profit shares, so investors who want to be involved with a business only monetarily will be more likely to join a partnership that is set up as an LLP. Business owners who need investors to get their companies up and running might want to consider this structure to help attract potential investors.
If a partner of an LLP is personally sued, his shares in the partnership cannot be taken in the suit, which is not the case in a corporation.
If you need help with understanding which is better: LLP or LLC, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.