Key Takeaways

  • LLCs generally offer broader liability protection than LLPs, shielding members’ personal assets from most business debts and lawsuits, while LLP protections vary by state.
  • The main "llc vs llp tax advantages" difference is flexibility: LLCs can choose their tax classification (sole proprietorship, partnership, or corporation), while LLPs are typically taxed only as partnerships.
  • Both LLCs and LLPs benefit from pass-through taxation, avoiding corporate double taxation, and may qualify for the 20% pass-through deduction under current tax law.
  • LLCs can have single or multiple owners, while LLPs require at least two partners.
  • State laws, industry restrictions, and management preferences play a major role in determining whether an LLC or LLP is better for your business.

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. 

Key Differences in Liability Protection

While both LLCs and LLPs provide some degree of liability protection, LLCs generally offer broader safeguards for owners. In most states, LLC members are not personally responsible for company debts or legal judgments, except in cases of fraud, personal guarantees, or gross misconduct. This protection typically extends to all members equally, regardless of their management role.

In an LLP, liability protection depends heavily on state law. In some states, partners are shielded from personal liability for the actions of other partners but may still be personally liable for the business’s overall debts and obligations. Other states require at least one partner to maintain unlimited personal liability. These variations mean that an LLC can be a more predictable choice for owners who prioritize asset protection.

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. 

LLC vs LLP Tax Advantages

Tax treatment is one of the most significant distinctions between an LLC and an LLP.

  • LLCs – By default, a single-member LLC is taxed as a sole proprietorship, and a multi-member LLC is taxed as a partnership. However, LLCs can elect corporate taxation (C corporation or S corporation) by filing the appropriate forms with the IRS. This flexibility allows LLC owners to choose the most tax-efficient structure based on factors like income level, reinvestment plans, and self-employment taxes.
  • LLPs – An LLP is almost always taxed as a partnership. This means profits and losses “pass through” to partners’ personal tax returns, and the LLP itself does not pay federal income tax.

Shared advantages:

  • Both LLCs and LLPs generally avoid corporate double taxation.
  • Owners may qualify for the 20% pass-through deduction under the Tax Cuts and Jobs Act, reducing taxable income by up to 20%, subject to limitations.
  • Business losses may be used to offset other income, lowering overall tax liability.

If maximizing flexibility in how your business is taxed is a priority, an LLC provides more options than an 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. 

Management Structure and Agreements

LLCs are governed by an operating agreement, which outlines:

  • Each member’s capital contributions
  • Profit and loss allocations
  • Voting rights and decision-making processes
  • Procedures for adding or removing members

An LLC can be member-managed, where all owners participate in daily operations, or manager-managed, where one or more managers handle operations while other members take on a passive role. This flexibility allows businesses to adapt management roles as they grow or bring in outside investors.

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. 

Industry and State-Specific Considerations

LLPs are often favored by professional service providers—such as lawyers, accountants, and architects—because some states restrict LLP formation to licensed professionals. Additionally, not all states recognize LLPs, and among those that do, the scope of liability protection can vary significantly.

Certain states impose higher annual fees or franchise taxes on LLCs than on LLPs, which can influence the decision. On the other hand, LLCs are more widely accepted across states and may be available to a broader range of industries, including those where LLP formation is restricted.

Frequently Asked Questions

  1. Which offers better tax advantages, an LLC or an LLP?
    An LLC offers more flexibility, allowing owners to choose sole proprietorship, partnership, or corporate taxation, while LLPs are generally taxed only as partnerships.
  2. Can a single person form an LLP?
    No. An LLP requires at least two partners, while an LLC can be formed by a single member.
  3. Do both LLCs and LLPs avoid double taxation?
    Yes. Both are typically taxed as pass-through entities, meaning profits are taxed at the owner level, not the business level.
  4. Are LLPs allowed in every state?
    No. Some states do not allow LLP formation, and others restrict them to licensed professional services.
  5. Which entity offers stronger liability protection?
    Generally, LLCs offer broader and more consistent liability protection across states, while LLP protections vary depending on local laws.

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