LLP Vs LLC: What Is The Key Difference?
Limited Liability Company LLC and Limited Liability Partnership LLP are two business structures that offer liability protection to the owners or partners of the professional corporation. An LLC and have only one partner but an LLP will have more than one partner/one or more owners. Both offer pass-through taxation and similar tax documents. There will be management duties, tax benefits, legal protections, and liability protections, and the business will have one or more partners. Some LLCs provide more flexibility in terms of management structure and tax options, while some LLPs are typically used by professional service firms where partners actively participate in the business’s management. This type of manager management can lessen the business burden. Additionally, the LLC owners or business partners and the owners in an LLP organization may have greater protection from personal liability in some cases, but there may be restrictions on ownership, member management, and transferability of partnership interests.
In an LLC, the members can choose to have manager management or member management structures. In a member-managed LLC, all members have an equal say in the management of the company and can make decisions for the business. In a manager-managed LLC, the members appoint one or more managers to handle the day-to-day operations and decision-making of the company. The manager(s) can be a member or an outside party, and they have the authority to act on behalf of the company. They are not separate entities.
Both LLC and LLP offer protection to owners and must abide by state laws. Their personal assets are shielded from the business’s debts and legal obligations. However, there may be some key differences in the way business debts are handled for each business entity type:
- In an LLC, the owners (called members) are not liable for the business’s debts and obligations beyond their investment in the company. This means that if the LLC incurs any debts or legal liabilities, creditors can only go after the LLC’s assets, not the members’ personal assets.
- In an LLP, the partners are also offered some or unlimited personal liability for the partnership’s debts and obligations, but there may be some exceptions. For example, partners may be liable for their own wrongful acts, omissions, or misconduct, or if they personally guarantee a debt or obligation of the general partnership.
LLC (Limited Liability Company) and LLP (Limited Liability Partnership) are business structures that provide limited personal liability protection to owners or partners while offering different management and tax options. This structure will be determined by each partner’s direct financial investment. The LPP and LLC cost is similar.
Limited Liability Company
An LLC is a type of business structure that provides protection to its owners, known as members. LLCs offer flexibility in management and tax options while shielding members’ personal assets from business debts and legal obligations.
Read More: How to Start an LLC 2024
Limited Liability Partnership
An LLP is a type of business structure that provides liability protection to its partners. It is commonly used by professional service firms where partners actively participate in the business’s management. LLPs may offer greater personal protection for partners in some cases, but there may be restrictions on ownership and transferability of general partnership interests.
LLP vs LLC: Key Differences
LLPs are partnerships providing personal liability protection, commonly used by licensed professionals. They have at least one partner. If these are multi-members, they are usually called partners. All have voting rights but some will have a voice in decisions and others will be silent partners. LLCs provide protection and tax flexibility for any business. They may be single members, a general partner, or multiple partners.
Asset Protection/Limited Liability Protection
In both cases, the owner’s personal assets are shielded from the business’s debts and legal obligations. However, there may be some differences in the level of asset protection:
Partners in an LLP may have greater protection from personal liability in some cases, but there may be restrictions on ownership and transferability of general partnership interests. In addition, partners may still be personally liable for their own wrongful acts, omissions, or misconduct.
LLCs offer robust asset protection to their members, who are shielded from personal protection for the company’s debts and obligations beyond their investment in the company. LLCs also provide flexibility in terms of structure and tax options.
Management & Flexibility
LLCs offer flexibility in terms of structure, allowing LLC members to manage the company directly or to appoint managers to run the business. Members’ management powers and responsibilities can be defined in the LLC operating agreement, also called a written partnership agreement, which can be customized to meet the members’ specific needs and preferences.
LLPs are typically used by licensed professionals where partners actively participate in the business’s management. The structure may be more rigid than an LLC, with partners sharing management and decision-making responsibilities equally or according to a predetermined general partnership agreement.
Either way, there should be a managing partner who is responsible for the day-to-day business operations of the business. The managing partner has the authority to make decisions on behalf of the company and manage its affairs, including hiring employees, entering into contracts, and managing finances. The managing partner may also have the power to bind the company in legal agreements and may be held liable for the company’s obligations.
Taxation of LLCs & LLPs
LLCs are considered pass-through business entities for tax purposes, meaning that the company’s income is passed through to the LLC members, who report it on their personal income taxes. This can allow for flexibility in terms of tax planning and deductions.
LLPs are also generally taxed as pass-through entities, although there may be some differences in state tax laws and tax documents. However, because LLPs are typically used by licensed professionals, there may be additional tax implications related to the partners’ compensation and the types of services provided. These are different than corporate taxes.
LLCs and LLPs are taxed based on their structure. Single-member LLCs and LLPs are typically taxed as sole proprietorships, while multi-member LLCs and LLPs are generally taxed as partnerships. Either way, this can be noted on personal income taxes. The business income flows through to the owners’ personal tax forms and returns, and they pay self-employment taxes on the net business earnings. Seek advice from a tax professional to ensure compliance with IRS regulations and state tax laws regarding these business earnings. These are different from corporate taxes and require personal tax forms.
Best Option for You: LLC vs LLP?
Consider limited liability protection, management flexibility, taxation, and ownership structure to determine which separate business entity is best suited for your business.
Why Choose LLP
LLPs are typically used by licensed professionals where other partners actively participate in management. They may provide greater protection from liability in some cases and may be subject to fewer restrictions on ownership and transferability of partnership interests. Members may be held personally liable for their own negligence or wrongdoing.
Why Choose LLC
LLCs provide more flexibility in terms of structure and taxation, while still offering personal protection for owners. LLCs may also have fewer restrictions on ownership and transferability of ownership interests compared to LLPs. Members may be held personally liable for their own negligence or wrongdoing. This means that if a member of an LLC commits an act of negligence that causes harm or damages to someone, they may be held personally liable for those damages, rather than the LLC is solely liable.
5 Basic Steps to Start an LLC in 2024
When setting up a business, choosing the right legal structure is crucial. Two popular options are Limited Liability Companies (LLCs) and Limited Liability Partnerships (LLPs), each with unique advantages and considerations.
Choose a Name for Your LLC
When choosing an LLC name, consider its availability, uniqueness, and compliance with state naming requirements. You can conduct a name search and reserve your chosen name with the state.
Choose Your Registered Agent
When choosing a registered agent for your LLC, consider their availability, reliability, and compliance with state requirements. You can appoint yourself, a member, or hire a professional service.
Read More: Best Registered Agent Services 2024
File Articles of Organization
To file Articles of Organization for an LLC, gather necessary information, and complete the appropriate form with the state. Include the business organization name, registered agent, management structure, and purpose. Pay any applicable fees and submit the form to the state.
Create an LLC Operating Agreement
To create an LLC agreement, consider the company’s management structure, ownership interests, financial contributions, and operational procedures. Draft the agreement to address these issues, and have members review and sign it. Keep a copy of the agreement with the company records.
Obtaining an EIN
To obtain an Employer Identification Number (EIN) for your LLC, complete the online or paper Form SS-4 with the Internal Revenue Service (IRS). Provide information such as the business structure, name, address, and purpose. The EIN will be issued immediately upon successful submission of the form. An EIN is used by professional businesses to identify themselves for tax purposes. A TIN (Taxpayer Identification Number) is a broader term that includes EINs and other types of identification numbers used for taxation.
The Top 2 LLC Formation Services
|Northwest Registered Agent
Northwest Registered Agent
Northwest’s suite of tools offers services at a reasonable price. The main difference between Northwest and similar entities is that Northwest only offers one paid plan for services. The initial cost is $39 to file the LLC paperwork; all other charges are due as per your state’s regulations. There is a separate option, called Pay In Full. With this option, which costs $225, Northwest will file the LLC, and provide agent services for one year, however, all other charges from state fees, etc., will still apply.
Northwest also has a strict no-data-selling policy and will provide pricing changes in advance. Northwest also offers the ability to pay by the month, with an auto-renew option.
Zenbusiness is a one-stop shop for SMB preparation. Through Zenbusiness you can search for available names, create articles of incorporation, find out the needed documentation for your state and federal filings and registrations, obtain an EIN, and build the business’s web presence through domain names, email, and domain privacy protection.
Zenbusiness offers three tiers of members. For $49 (Starter Plan), you can form your company within 3 to 4 weeks, file LLC paperwork, get an annual compliance service, search for business names, have phone/email support, and have online document access. The Starter Plan does not automatically renew each year. For $199 (Pro Plan), you get all of the Starter Plan benefits, plus extras including an operating agreement, expedited filing services, a virtual company guide, and Google Ads credit. The Pro Plan automatically renews each year. For $299 per year (Premium Plan), you get all of the Starter Plan and Pro plan benefits plus extras including a website, a domain name, and an email address. The Premium Plan automatically renews each year.
Read More: Best LLC Services 2024
Final Thoughts LLC vs LLP
Choosing between LLC and LLP depends on the specific needs and goals of the business. Consider factors such as liability protection, management flexibility, taxation, and ownership structure. This structure will be determined by each partner’s direct financial investment. LLCs may offer more flexibility in management and taxation, while still providing personal protection. LLPs may be better for professional service firms with active partner involvement and may have fewer restrictions on ownership and transferability of interests. Seek advice from a legal or financial professional when making the decision. Both LLP and LLC offer benefits to the owners, however, only the LLC can be either a sole proprietorship or S Corporation.
Frequently Asked Questions (FAQs)
An LLP (Limited Liability Partnership) is a type of business structure that offers liability protection to its other partners while allowing them to participate in management and decision-making. It has more than one owner.
An LLC (Limited Liability Company) is a type of business structure that offers liability protection to its owners while providing flexible tax and management options.
Yes, an LLC and LLP can have multiple members who own and operate the business together. In an LLC, the members share in profits and losses and have liability protection. An LLP can have multiple partners who jointly own and manage the business while being shielded from liability for the partnership’s obligations.
No, an LLP and LLC cannot be considered sole proprietorships. This is a type of business owned and operated by one individual who is personally responsible for all the business’s obligations and debts. In contrast, both LLP and LLC provide liability protection to their owners or partners.
Choosing between an LLC and an LLP depends on various factors, including the business’s goals, ownership structure, management preferences, and liability protection needs. In general, an LLC may be a better option for professional businesses that require more flexible management, simpler tax structures, and more significant liability protection. An LLP may be more suitable for professional service businesses, such as law firms or accounting firms, that require business partners to be actively involved in the business’s management and decision-making.
Both are considered pass-through entities for taxation, which means that the business earnings pass directly through to the owner’s or partners’ individual tax returns. However, there may be some differences in the tax implications of each separate business entity type:
– LLC: The LLC’s profits and losses are reported on the owners’ individual tax returns, and the LLC itself does not directly pay income taxes. Depending on the number of members, an LLC may be classified as a single-member LLC or a multi-member LLC, which can affect the tax treatment.
– LLP: The partnership itself does not directly pay income taxes, and the profits and losses are passed through to the partners’ individual tax returns. This means the business earnings pass directly to the owner and each partner’s tax liability is based on their share of the partnership’s income, regardless of whether they withdraw money from the partnership.
This is a legal concept that refers to a business owner’s personal responsibility for all the business’s debts and obligations. In this business structure, the business owner is liable for all the business’s losses, debts, and legal liabilities. This means that if the business incurs any debts or legal obligations, creditors can pursue the business owner’s personal assets, such as their savings, property, and his or her investment in the business, to recover the debt. Unlimited liability is typically associated with sole proprietorships and general partnerships, where the owners are not shielded from liability for the business’s obligations. It is the opposite of limited liability, where business owners are not personally responsible for the business’s debts and obligations beyond their investment in the business.
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IRS. Limited Liability Company LLC | Internal Revenue Service. Irs.gov. Published 2019. Accessed March 6, 2023. https://www.irs.gov/businesses/small-businesses-self-employed/limited-liability-company-llc
Limited Liability Partnership. corporations.utah.gov. Accessed March 6, 2023. https://corporations.utah.gov/business-entities/limited-liability-partnership/
Limited Liability Company Operating Agreement. www.sec.gov. Accessed March 6, 2023. https://www.sec.gov/Archives/edgar/data/1345691/000119312512119426/d230618dex1012.htm
SE:W:CAR:MP. Form SS-4 (Rev. January 2010).; 2016. Accessed March 6, 2023. https://www.irs.gov/pub/irs-pdf/fss4.pdf
Taxpayer Identification Numbers TIN | Internal Revenue Service. Irs.gov. Published 2011. Accessed March 6, 2023. https://www.irs.gov/individuals/international-taxpayers/taxpayer-identification-numbers-tin