LLP vs. Company: Everything You Need to Know
Comparing an LLP vs. company means looking at the characteristics of a LLP and those of a private company, such as a limited liability company (LLC).3 min read
Comparing an LLP vs. company means looking at the characteristics of a limited liability partnership (LLP) and those of a private company, such as a limited liability company (LLC).
Depending on the jurisdiction, an LLP is a business that is owned by two categories of partners —managing partners and junior partners. The managing partners of an LLP are the ones that actively and fully manage the business. They also take complete, personal responsibility for the liabilities of the business. The junior partners of an LLP are the ones that don't actively manage the business and are not personally responsible for its liabilities outside their investment.
An LLC, on the other hand, is a company that's owned by members that aren't personally responsible for the company's liabilities. An LLC combines the characteristics of a corporation with those of a sole proprietorship or a partnership.
Features of an LLP
The junior partners of an LLP are protected from taking responsibility for the liabilities or debts that arise as a result of another partner's default. In such cases, only the defaulting partner is held responsible for the liabilities that arise from their default. LLPs enjoy tax advantages similar to LLCs. However, they can't be owned by corporations.
The major difference between an LLP and an LLC is that an LLP must have at least one managing partner. In other words, an LLP legally exposes its active manager(s) just as a simple partnership exposes its owners.
The passive or silent partners of an LLP are protected against the liabilities of the LLP as long as they're not actively involved in its management. If they get involved, they could legally forfeit their protection. It's easier to organize and manage an LLP than a corporation. That's why professionals who only want to protect their personal assets prefer LLPs.
Forming and Managing an LLP
An LLC can be formed by almost anybody, but that's not entirely true of an LLP. In some states, an LLP can be formed only by licensed professionals and must be made up of, at least, two partners. A professional business is the most common example of such an LLP. Law firms and, in some cases, groups of medical practitioners employ the LLP format when their founding partners or a group of professionals are managing the organization, while other professionals are passively investing as partners.
Private companies and LLPs are expected to pay 30 percent of their taxable revenue as income tax. In addition to that, they're expected to pay surcharges, depending on their total or net profit. The major difference between them is in the tax for dividend distribution, which requires a private company to pay an extra tax at a 20.36 percent rate on amounts that are distributed, declared, or paid to shareholders by their private companies.
Incorporating LLPs vs. Incorporating LLCs
The incorporation of an LLP calls for lesser legal compliance, while the incorporation of a private company requires the filing of various documents and forms, such as the articles of association and a memorandum of association, at the time of incorporation. A private company is bound by its articles of association and memorandum of association, but an LLP agreement makes it operationally flexible to structure and manage the LLP.
As a general rule, to incorporate either an LLP or an LLC, you need to do the following:
- File a document of organization with the state agency in charge of incorporating businesses in your state.
- Pay a filing fee.
- Create a partnership agreement (for LLPs).
- Create an operating agreement (for LLCs).
A private company can be quickly transformed into an LLP, but transforming an LLP to a private company requires meeting the detailed demands of the law, which may not be in the best interest of the organization, especially concerning taxes and time.
Doing Business in Other States
LLPs may have greater challenges with legally acquiring permission to do business in a state other than theirs. LLCs, on the other hand, can easily operate their businesses in other states, provided they legally file foreign business registration papers in such states.
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