An important aspect of starting a business is choosing which type of business entity to create. Two popular entities are Limited Liability Companies (LLC) and Limited Liability Partnerships (LLP). Both are very similar yet they have their unique characteristics including how they are managed, taxed or limit their liabilities. How can you differentiate between the management, taxation and liability of LLC and LLP?
LLPs are generally left for a few professionals that may all co-manage their partnership, while LLCs can be managed by a small number of owners relative to total ownership. LLCs have the option to be further taxed as either an S-Corp, C-Corp, or a partnership, while LLPs are strictly partnerships. Both are limited liability but each of them are designated differently by the state laws of the state where the company is based.
I would like to add more to what @mmejia said. LLP and LLC are the most common and most used types of entities used for small start-up companies. LLC is more chosen by small businesses that do not focus on law, accounting, or architecture. In other, words businesses that does not require partnership or have practices. On the other hand, LLP is used for practices and partnerships as the main business goal. Therefore, LLP is meant for licensed profession like law, accounting, or architecture. In terms of taxation, they have very similar rules such as self-employment tax, excise/franchise taxes in some states. The amount of cost to create them are identical for both LLC and LLP(formation fee: 50 - 500). If you would like more information please visit: https://fitsmallbusiness.com/llp-vs-llc/.
LLPs die when one owner dies, so beyond the limited liability part, there aren't so many benefits to an LLP. That's why, as per mentioned above, LLP's aren't used very much. Furthermore, it's less likely that a company fits the requirement to become an LLP as there are more restrictions of who can actually file to be one. I think an LLC is easier to attain and has better benefits for most kinds of businesses so that's why most start-ups lean more to an LLC than an LLP.
A comparison of LLC versus LLP related to management, taxation, liability can be used to illustrate their difference as follows.
Regarding management LLC may be management is not limited to members. While for a LLP management is limited to members.
Regarding taxes a single person LLP is more favorably considered by IRS while a single person LLC may be considered as "self employed" by the IRS possible trigger various other non tax mandatory deductions.
Regarding liability, this is where the most significant difference arises. An LLP protects each member against liability due to other members while an LLC does not allow protect for liability due to other members
An LLP can have two or more owners run by members. The company has limited liability while taxes are flow-through, making them uncomplicated. These owners are based on the amount each partner invests, having complete control, but will not be able to exist anymore if one of them passes away. An LLC can have multiple owners and is run by members with limited risk. Ownership, like an LLP, is based on the amount each partner invests. Managers can hire other managers and non-managers and can sell shares and get loans easily. Taxes can be flow-through and double taxed, but managers don't have to share profits, leading to an issue in transferable ownership.
I would like to add more about the managing structure of LLC and LLP. Generally, an LLP runs like a simple business partnership where management duties are divided among partners. LLP has a managing partner/partners that are responsible for the action of the partnership. And usually, partnership agreements set up the method of operating the management system. On the other hand, LLC members can manage the business themselves(commonly referred to as management members) or they can hire people to do managerial work. And the non-management members aren't involved with the management work. Generally, LLCs are required to appoint external auditors while LLPs don't need to appoint external audits.
LLC is a legal entity all its own, whereas LLP is owned by two or more people who share legal responsibility of the business entity. LLC members can manage the business themselves or they can hire on appoint one or more members and non-members to manage the business. An LLP operates like a general business partnership, where management duties are equally divided between partners. A partnership agreement should set out how business decisions will be made. LLC offers limited liability protection against legal actions and business debts. With the protection, the personal possession of the owners cannot be used to pay for any of the business's debts. Each owner is as liable for business debts as what they invested in the company. On the other hand, in LLP, owners are each fiscally responsible for business debts and can be held accountable for all business directions.
An important aspect of starting a business is choosing which type of business entity to create. Two popular entities are Limited Liability Companies (LLC) and Limited Liability Partnerships (LLP). Both are very similar yet they have their unique characteristics including how they are managed, taxed or limit their liabilities. How can you differentiate between the management, taxation and liability of LLC and LLP?
If you are looking to get the most money out of your business, an LLC would be the correct choice since an LLC limits liability and is more tax flexible. An LLC can also sell shares to raise money for the business and get loans easier, pay dividends, and pay less complicated taxes than an LLP. However, an LLC requires a lot of paperwork to set it up. On the other hand, an LLP allows the owners to have complete control and keep all the revenue. However, an LLP is not recognized in all states and dies when one of the partners dies. With all the statements above being recognized, it matters in what kind of situation you are to choose which entity to create.
Both limited liability companies (LLCs) and limited liability partnerships (LLPs) combine aspects of corporations and partnerships. Differences between the two business structures include management requirements, liability protections, liability insurance obligations, and tax benefits. In the debate of LLP vs LLC, it is important to consider the similarities and differences between the two entity types. They key structures to oversee include ownership, liability, taxes, and management. But it all depends on your profession and your state. There's not one is better than the other. If you're a professional who needs a license to do business, you're better with having your company as an LLP if your state allows it. Otherwise, not a professional, an LLC is most likely the best fit for your business.
LLCs and LLPs share many characteristics. They can both offer owners limited liability, tax benefits, and flexible management roles. But on closer look, these business structures differ in a meaningful way. Both provide limited liability for owners. Both an LLC and an LLP provide their owners with some protection against personal liability, typically reducing each owner's liability to the amount they invested in the business. For example, in this case, if an owner invested $8,000 into their company, then they'd only stand to, at most, lose their $8,000 investment. Generally, an LLC provides the most liability protection. Except for cases of business mismanagement, the members aren't personally responsible if the LLC is sued or owes any debt. This limited liability serves to protect personal assets like members' houses, bank accounts, and cars.
