llc-vs-llp

What Are An LLC And An LLP? LLC Vs LLP In A Nutshell

A limited liability company (LLC) is a separate business entity with one or multiple owners that are otherwise known as members. Various legal filings and fees are required to create an LLC. A limited liability partnership (LLP), on the other hand, is a general partnership between two or more people that does not require legal filings.

Understanding LLCs

Limited liability companies (LLCs) are business entities that exist in the United States. The entity itself is separate from its owners from a legal standpoint. This means the owners can access company funds without being personally liable for its debts.

It can be helpful to consider an LLC as the combination of a partnership and a corporation. The owners of the LLC can receive the same legal protections as a corporation with much less paperwork and at a reduced cost. The owners of an LLC are called members and there may be a single individual or multiple members.

Understanding LLPs

Limited liability partnerships (LLPs) describe formal structures between two or more partners that offer some degree of protection from the liabilities of the partnership.

LLPs are favored by licensed professionals such as architects, lawyers, and accountants since they are prohibited from forming LLCs in some U.S. states. This arrangement allows the professional to avoid unlimited liability for the business’s obligations and any potential partner negligence. 

LLPs require at least two founding partners, with the specifics of the partnership stipulated in a partnership agreement.

Core differences between an LLC and LLP

Most of the core differences between an LLC and LLP arise from the fact that LLC owners are called members while LLP owners are called partners. With that in mind, let’s now take a look at some of the differences between the two entity types:

Limited liability protection 

The members of an LLC are only liable for debts equivalent to the amount they have personally invested in the business. They are not liable for the misconduct of another member but, having said that, are liable for their own misconduct. 

In general, LLP partners are liable for the misconduct of other partners. However, in some states, there exists limited liability where partners are not liable for partner misconduct but remain liable for business obligations.

Taxes

For taxation purposes, an LLC can be taxed as a partnership, C corporation, S corporation, or sole proprietorship. 

The tax structure of an LLP is limited to partnerships only. What’s more, the Internal Revenue Service (IRS) considers the company’s profit or loss to be reflected in the personal income tax returns of the partner(s). In other words, the entity itself does not pay tax.

Management and decision making

As we noted earlier, the owners of an LLC are known as members while the owners of an LLP are considered partners. 

LLCs have more flexibility in terms of internal management structure and decision-making responsibility, with these details set out in an operating agreement.

LLPs, on the other hand, make similar assertions in a partnership agreement where there are also details relating to profit-sharing and operating structure.

Key takeaways:

  • A limited liability company (LLC) is a separate business entity with one or multiple owners known as members. A limited liability partnership (LLP) is a general partnership between at least two people known as partners.
  • Licensed professionals such as architects, lawyers, and accountants use LLPs since they are prohibited from forming LLCs in some U.S. states. LLCs can be complex, but it is helpful to think of them as a mixture of corporation and partnership.
  • LLCs differ from LLPs when one considers the extent of liability protection, management and decision making, and taxation structure.

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