Partnership vs. limited company — what's the difference? A limited liability partnership is a legal structure that requires a written partnership agreement and often comes with annual reporting requirements depending upon your local jurisdiction. Similar to a common partnership, all individuals identified in an LLP can take part in the administration of the partnership. A limited liability company is a business entity that may have one owner or several. Each owner is referred to as a member. A limited liability company may receive great tax flexibility by providing members with the opportunity to make the best decisions for their business.

What Is a Limited Liability Company?

Limited liability companies (LLCs) are always formed under state law rather than federal law. Generally, an LLC may be owned by one individual or several, one corporation or several, or other LLCs. The articles of organization highlight the amount of each member's ownership interest in the company. LLCs offer members a tremendous amount of flexibility and benefits, some of which include:

  • Allowing LLCs to have as many members as they prefer
  • Permitting other LLCs and corporations to be members
  • No requirement to follow state-mandated membership guidelines and management reporting deadlines (like in corporations)
  • No requirement to pay taxes because the profits and losses are categorized as pass-through
  • Avoiding double taxation
  • Receiving tax relief from poor-performing LLCs

Common Types of LLC

All types of small businesses may choose to elect the LLC format. LLCs are perfect for small to mid-size businesses that have multiple owners. Remember, many states now require all businesses with more than one owner to form an LLC. As opposed to simple partnerships, the LLC format provides its members with limited liability, which protects the owners' personal assets from creditors.

LLCs are required to file their earnings and revenues on an annual basis with the IRS on Form 1065. Remember, the IRS will cross-reference Form 1065 against the income reported on a member's individual tax return to make sure the proper amount of tax is being paid by the member.

Similar to partnerships, LLCs are allowed the autonomy to be structured and operated in the best way the members see fit. Unlike simple partnerships, LLCs are required to register with their state's secretary of state. The most significant benefit is that LLC members are protected from personal financial liability, no matter how active or inactive their role is with the company.

What Is a Limited Liability Partnership?

A limited liability partnership (LLP) is considered a blend between a corporation and a partnership. It needs to be an unincorporated business that's owned by two or more members called partners. Beyond the assets that were invested in the partnership, none of the partners may be held personally responsible for the actions of the other parties. The partnership agreement outlines each partner's ownership in the company. Depending on the location of the business, a partnership may need to register with their secretary of state's office.

LLPs share the same tax advantages as LLCs. However, LLPs are not allowed to have corporations as their partners. The main difference between LLCs and LLPs is that LLPs are required to have one managing partner that bears all liability for the actions of the partnership. Therefore, the managing partner of an LLP is as legally exposed as the members in a simple partnership. As long as the silent partners and investors in an LLP do not take on the role of a managing partner, they will receive liability protection.

Limited Liability Partnership vs. LLC

Despite the fact that an LLP offers limited personal liability protection, an LLC may be more enticing because the protection covered is more comprehensive. Remember, not all states allow LLPs, so you may be forced into selecting an LLC. For example, certain states only allow specific professions to form an LLP. Typically, engineers, architects, accountants, and lawyers are allowed to form an LLP, while all other professions are prohibited. When used with this digression, the LLP is usually referred to as a registered limited liability partnership (RLLP) or a professional limited liability partnership (PLLP).

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