LLP vs Company vs Partnership: Everything You Need to Know
The LLP vs company vs partnership debate also referred to as general partnerships, and companies that generally require two or more individuals to create.3 min read updated on February 01, 2023
The LLP vs company vs partnership debate includes limited liability partnerships (LLPs) and partnerships, also referred to as general partnerships, and companies that generally require two or more individuals to create.
Limited Liability Partnerships Versus Partnerships
To form a general partnership, formal action is not required. This also includes no need for a written document. An LLP can be created with an expressly written contract or created with two or more individuals agreeing to be partners.
In contrast, to form a limited liability partnership, an individual must file appropriate documents plus a filing fee with the secretary of state or another official office to form the LLP. Also, an LLP must include in its name either "LLP" or "Registered Limited Liability Partnership." A general partnership may be less involved to set up but because there is no express agreement (contract), there can be a doubt that a partnership was ever formed.
A significant distinction between an LLP and a partnership is in regard to personal liability. With a partnership structure, each partner is liable for all debts of the partnership. For example, there are three partners in a general partnership. One partner is sued for malpractice. In this situation, if the partner being sued for malpractice cannot pay, the assets of the other two partners can be taken to satisfy the suit.
A limited liability partnership works differently as this business structure mostly ensure partners are responsible for themselves in the case of a lawsuit and are not liable for the actions of the other partners. The range at which you are protected from liability varies by state. A disadvantage of being part of an LLP is because partners do not have personal liability, it is risky for individuals and/or businesses to do business with the LLP.
Limited Liability Companies
A limited liability company (LLC) provides its members with the same liability protections as a corporation and the structural and tax advantages of a partnership. In most states, both limited liability partnerships and limited liability companies can be formed. Although there are some commonalities between the two, there are also distinct differences, especially when it comes to liability exposure. Choosing the right business structure depends largely on the type of business and its goals.
LLC owners are called members. They can either manage the LLC themselves or they can hire managers. LLCs have flexibility, too. For example:
- There is no limit to the number of members involved with the LLC.
- Corporations are allowed to be members.
- There are no state-mandated management and membership reporting requirements like those of a corporation.
- LLCs do not pay taxes as profits, and losses are "passed through" to members to file on their individual tax return, the same as with a partnership.
- LLC members avoid the double-taxation of corporations.
The LLC format is popular for many small and mid-size businesses. In some states, businesses with more than one owner are required to form an LLC. An LLC must annually report its revenues and earnings to the IRS using Form 1065. Unlike a simple partnership, LLCs must register with the Secretary of State. Like a simple partnership, the LLC structure allows the company to be run as they see fit.
LLCs are not recognized as a tax filing entity in the eyes of the IRS. Instead, the LLC is classified by the number of members it has and whether the LLC elects to be treated as a corporation.
Limited Liability Partnerships
LLPs and LLCs have the same tax advantages. With an LLP, there must be at least one managing partner who bears responsibility for the actions of the partnership. Silent partners and investors in an LLP have liability protection as long as they do not step into a managerial position. If they were to do so, a court could pierce the corporate veil of liability protection.
The most common type of LLP is a professional business, such as group medical practices and law firms. The organizational structure generally entails a founding partner or a group of partners who are in charge of the operation of the business. Junior partners usually have no say over the direction of the firm. Because of this, the LLP provides protection from problems that may arise due to a decision by management.
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