Key Takeaways

  • Both LLCs and LLPs combine aspects of corporations and partnerships but differ in ownership, liability, and tax treatment.
  • LLCs offer broader liability protection and flexibility in taxation (default pass-through or corporate election).
  • LLPs are often restricted to licensed professionals (like attorneys and accountants) and limit liability to each partner’s own actions.
  • LLCs can have unlimited members, including individuals, corporations, or other entities, while LLPs typically require at least two partners.
  • State rules vary significantly for both structures, especially regarding which professions can form LLPs.
  • LLCs are more popular for small businesses seeking flexibility, while LLPs are better suited for professional firms that value shared management.

What is The Difference Between an LLC and an LLP?

Looking at an LLP vs. LLC, both mix facets of a company and a partnership. The differences between a Limited Liability Corporation, also known as an LLC, and a Limited Liability Partnership, also known as an LLP, include how the members or partners purchase in, promote out, and add or remove members or partners. One other distinction is what portion of management or voting share each member or partner is given.

LLP vs LLC: Ownership Structure

One of the most important distinctions between an LLP vs LLC lies in ownership.

  • LLC Ownership (Members): An LLC can have one or multiple members, and there is no limit on the type of member. Individuals, corporations, trusts, and even other LLCs can own an interest in the company. This makes LLCs a flexible choice for startups and small businesses with diverse investors.
  • LLP Ownership (Partners): An LLP must have at least two partners. Typically, only licensed professionals can form LLPs, and ownership is restricted to those individuals. Unlike LLCs, LLPs cannot include corporations or outside entities as partners.

Forming an LLP vs. Forming an LLC

To form an LLP or LLC, you should file organizational paperwork together with your state company responsible for enterprise filings. Forms and directions can sometimes be found on the local government's website, and filings must be accompanied by a payment.

All LLCs should have a working agreement, and all LLPs must have a partnership agreement to spell out the rights and responsibilities of the property owners. In many states, LLP creation paperwork requires more detailed info than LLC creation paperwork does.

State-Specific Rules for LLCs and LLPs

Rules for forming and maintaining an LLP vs LLC differ depending on state law:

  • LLCs: Available in all 50 states, with broad flexibility in purpose and membership. Some industries, like banking and insurance, are excluded. Certain states require publication of formation notices.
  • LLPs: Not available in every state. Some states limit LLPs to professional groups, while others allow broader use. For example, California only permits licensed professionals (lawyers, accountants, architects) to form LLPs.
    Because of these differences, entrepreneurs should confirm the rules in their state before choosing a structure.

LLC Definition

An LLC is a certified entity that mixes individual protection like with a corporation and the personal tax breaks that come with running a partnership. LLCs are very popular business entities, especially for small business owners.

However, not every company can become an LLC. For example, banks or insurance companies cannot be formed under an LLC. There are also certain state-level regulations that prohibit some professional service industries from forming LLCs like doctors, accountants, or attorneys, for instance. In those instances, the professional service providers can form a variation of the LLC known as a PLLC or a professional limited liability company. The only state that prohibits this is California.

Tax Treatment of LLCs

LLCs have highly flexible tax options:

  • By default, single-member LLCs are taxed as sole proprietorships, and multi-member LLCs are taxed as partnerships. This avoids “double taxation.”
  • Members can elect for the LLC to be taxed as a C corporation or S corporation, depending on their financial strategy.
  • This flexibility allows LLC owners to adapt tax status as their business grows.

LLP Definition

An LLP is a common partnership with at least two owners, known as partners in the government’s eyes. An LLP is a combination of a company and partnership, wherein the partners are afforded limited personal liability in the venture.

One of the main differences between LLC and LLP is that an LLP requires one person, a partner, to be personally liable for the partnership. Silent partners and angel investors can stay protected as long as they do not take over a management role.

Currently, 40 states enable some LLP formation. The legal requirements can differ from one state to the next, and some states limit which professions can form an LLP. Thus, it’s important to research the requirements and limitations of an LLP in the state within which you operate.

Tax Treatment of LLPs

LLPs are taxed as partnerships, meaning profits and losses flow directly through to the partners’ personal tax returns. Unlike LLCs, LLPs generally cannot elect corporate taxation. This makes LLPs simpler to manage but less flexible for businesses that want to retain earnings or adjust tax strategies.

Advantages & Disadvantages of LLC Vs. LLP

An LLC is owned by members and is a mixture of the options of a company and partnership; the construction gives private asset safety for members. An LLP is owned by partners and gives a few of the identical protections from collectors as an LLC. Some states solely enable professional enterprises, like accounting agencies, to form an LLP. There are plenty of advantages to both.

When to Choose an LLC vs LLP

The choice between an LLP vs LLC depends on your business type and long-term goals:

  • LLC is better if:
    • You are starting a small business with one or multiple owners.
    • You want flexibility in how profits are taxed.
    • You plan to bring in investors or corporate members.
  • LLP is better if:
    • You are part of a licensed profession (law, accounting, architecture, etc.).
    • You want shared management with clear separation of liability among partners.
    • You do not need corporate tax options.

Liability

The non-public belongings of each member of an LLC are protected from actions by the company's collectors, as with a corporation. The partners within the LLP sometimes determine which member is answerable for the business money owed. If an LLC partner commits an act that's legally actionable, all members of the LLC can be held liable. Every associate in an LLP, however, is personally liable only for his or her own negligence; partners will not be liable for other associates' errors and are the sole risk to their capital funding within the LLC.

Operations

Both LLCs and LLPs are created as soon as the mandatory papers are filed with the state business division. The requirements for an overseas LLC to conduct business legally differ by state; however, the requirements for LLPs are typically common. An enterprise with dealings throughout a number of states might find the usual overseas LLP option helpful.

Owners

An LLC can have a number of members; there is no limit on what number of members the LLC can have. Members of an LLC will be organizations, trusts, another enterprise, or other people. In contrast to member administration assembly, every member shares accountability for operating the enterprise, and the administration group runs the enterprise under a supervisor administration assembly, and the remaining members aren’t concerned with business decisions.

Frequently Asked Questions

  1. Which is safer legally, an LLC or LLP?
    LLCs generally provide broader liability protection since members are shielded from most debts and liabilities. In LLPs, partners are only protected from other partners’ negligence, not their own.
  2. Can a single person start an LLP?
    No, LLPs require at least two partners. If you want to operate alone, an LLC is the better option.
  3. Which is better for taxes, an LLC or LLP?
    LLCs offer more flexibility since they can be taxed as a sole proprietorship, partnership, S corp, or C corp. LLPs are always taxed as partnerships.
  4. Can corporations or other businesses own an LLP?
    No, LLPs generally restrict ownership to licensed individuals. LLCs, however, can be owned by other businesses or entities.
  5. Which is easier to form, an LLC or LLP?
    Forming an LLC is usually simpler, as all states allow LLCs with fewer restrictions. LLPs may only be available to professionals in specific states.

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