Key Takeaways

  • An LLP (Limited Liability Partnership) is not a corporation; it is a form of partnership offering limited liability to its partners.
  • Corporations are separate legal entities, while LLPs are typically pass-through entities for tax purposes.
  • LLP partners manage the business directly, unlike corporate shareholders who elect directors to oversee operations.
  • LLPs are best for professional services (law firms, accountants, etc.), while corporations are suited for scalable or investor-backed businesses.
  • Both structures offer liability protection but differ in tax treatment, management, and compliance requirements.

Choosing between an LLP vs corporation structure is one of the first steps in creating a business entity. You need to decide whether you will want to form your business as a limited liability partnership (LLP) or as a corporation.

Corporations, LLPs, and Other Business Structures

In a corporation, the business is completely separate from the owners and will be designated by having an indicator at the end of its name, such as "incorporated," "limited," or an abbreviation of one of them. To be incorporated, a business must file with the state and pay the necessary fees.

When it comes to taxation of a corporation, the corporation will be required to file a yearly tax return and send in payment for its tax liability. The owners that are shareholders will pay their own personal income taxes on the dividends that they receive from the company. In a corporation, shareholders can also be employees and executives in the company.

An S-corporation is a business election that C-corporations can choose that will change the way their taxation occurs as well as how some of their organization is structured. In an S-corporation, the business will file a tax return but will not pay taxes at the corporate level. The taxes for the business will be paid through the personal income return of the shareholders.

For multiple-owner businesses that do not want to be considered corporations, there are a couple of businesses entity options to choose from, including limited liability companies and partnerships. In these types of businesses, the owners cannot be an employee.

In a single-owner business, the business's proprietorships sole proprietor and owner is the same person. Instead of being a sole proprietorship, you can also be classified as a single-member LLC. If your business is a sole proprietorship, you will not need to register your company with the state.

Understanding Whether an LLP Is a Corporation

A common question among new business owners is “Is an LLP a corporation?” The short answer is no. An LLP, or limited liability partnership, is a distinct legal structure designed for two or more partners who wish to run a business together while limiting their personal liability.

Unlike a corporation, which is a separate legal entity from its owners (shareholders), an LLP combines features of both partnerships and corporations. It provides liability protection—so each partner is shielded from the negligence or misconduct of others—but it does not separate the entity entirely from its partners for tax purposes.

Corporations, on the other hand, are formed by filing articles of incorporation and are governed by a board of directors. They are subject to corporate income tax and may face double taxation unless they elect S-corporation status. LLPs are generally pass-through entities, meaning profits are taxed only once on each partner’s individual return.

Which Entity Is Best for Your Business and to Protect Your Assets?

When deciding which business entity is the best for your company, there are many things that you will need to consider regarding both the current situation of your business and your business in the future. These include the following:

  • Legal protection
  • Tax
  • Financing
  • Business credit
  • Marketing
  • Raising money

After determining what factors are important to your business and how to best handle each of them, you will need to decide on a business structure:

  • S-corporation
  • Single-member LLC
  • Single-member LLC taxed as an S-corporation
  • LLC taxed as an S-corporation
  • LLC taxed as a limited partnership

LLP vs Corporation: Key Legal and Tax Differences

When deciding between an LLP and a corporation, it’s essential to weigh both legal protection and tax implications.

1. Legal Structure and Ownership

  • Corporation: Has shareholders, directors, and officers; operates as a completely separate legal entity.
  • LLP: Owned and managed by partners, who can participate in daily operations without risking personal liability for other partners’ actions.

2. Taxation

  • Corporation (C Corp): Pays corporate taxes, and dividends are taxed again at the shareholder level.
  • S Corporation: Avoids double taxation through pass-through taxation but must meet IRS restrictions.
  • LLP: Typically taxed as a pass-through entity; partners report their share of income on personal tax returns.

3. Liability Protection

  • Corporation: Protects shareholders from company debts and lawsuits.
  • LLP: Protects partners from the negligence or malpractice of others but not from their own misconduct.

4. Management and Compliance

  • Corporation: Must follow strict corporate formalities, including board meetings, bylaws, and annual reports.
  • LLP: Easier to maintain, with fewer record-keeping and meeting requirements.

5. Best Use Cases

  • LLP: Ideal for licensed professionals like lawyers, accountants, or architects.
  • Corporation: Best for startups and companies seeking to raise outside investment or go public.

What Is an LLP?

A limited liability partnership is a business with at least two owners who will have limited personal liability when it comes to business debts. Some important things to know about an LLP include the following:

  • LLPs have to be formed by two or more licensed professionals.
  • General partners are protected from the liability of the other partners or employees in the company.
  • An LLP would typically be formed by professional groups such as doctors and attorneys.
  • An LLP protects each partner from debts and or liability incurred by other partners in the organization.
  • LLPs are an easy entity to manage and organize, which makes them a good option for professionals looking for asset protection.

Advantages and Disadvantages of an LLP

Advantages:

  • Limited Liability: Partners are not personally responsible for others’ mistakes.
  • Flexible Management: Partners can directly manage operations.
  • Pass-Through Taxation: Avoids corporate tax and double taxation.
  • Ease of Formation: Often simpler and cheaper to form than corporations.

Disadvantages:

  • Limited Availability: Some states only allow LLPs for specific professions.
  • Less Investor Appeal: LLPs cannot issue stock.
  • Tax Complexity: Partners may face higher self-employment taxes.
  • Variations by State: Registration rules and liability protections differ depending on the jurisdiction

What Is an S-Corporation?

An S-corporation is not a business legal structure but is a tax election that a business can make with the IRS. An S-corporation uses "pass-through" taxation, which prevents taxes at the corporate level and instead has the shareholders pay personal income tax on their portion of the business's profits and losses. Some of the things you need to know about an S-corporation include the following:

  • Shareholders must be U.S. citizens.
  • Shareholders can only be individuals, estates, and some trusts.
  • Shareholders do not have personal liability for the business debt.
  • S-corporation must issue stock but can have no more than 100 shareholders.
  • An S-corporation is perpetual in existence.
  • You can freely transfer stock in an S-corporation.
  • S-corporations enjoy "pass-through" taxation.
  • You have no self-employment tax liability with an S-corporation.
  • FICA and other taxes are withheld from salaries paid to owners who are also employees.

Choosing Between an LLP and an S Corporation

Choosing between an LLP and an S Corporation depends on your business’s goals and structure.

  • If you are forming a professional practice (e.g., attorneys, doctors, accountants) and want flexibility in management with minimal corporate formalities, an LLP may be more appropriate.
  • If your goal is to attract investors or issue stock, an S Corporation might be better since it offers equity options and a more defined structure.
  • S Corporations also provide pass-through taxation, but they impose more restrictions on ownership and require adherence to corporate formalities like issuing stock and holding annual meetings.

Ultimately, an LLP emphasizes flexibility and simplicity, while an S Corporation offers structure and potential tax savings for growing businesses.

Frequently Asked Questions

1. Is an LLP considered a corporation for tax purposes?

No. An LLP is typically treated as a pass-through entity, meaning it is not taxed separately from its partners. A corporation, however, is a separate taxable entity unless it elects S-corporation status.

2. Can an LLP become a corporation later?

Yes. An LLP can convert into a corporation by filing the appropriate conversion documents with the state and meeting the new corporate requirements.

3. Are LLP partners considered employees?

No. Partners in an LLP are generally self-employed and report their income through Schedule K-1 forms.

4. Does an LLP provide the same liability protection as a corporation?

Both structures offer limited liability, but LLP protection applies mainly to professional negligence, while corporate protection extends to business debts and contractual obligations.

5. Which is better for a small business—LLP or corporation?

For small professional practices, an LLP may offer more flexibility. For businesses seeking growth or investment, a corporation—especially an S Corporation—might be the better option.

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