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.
|Scenario||Limited Liability Company (LLC)||Limited Liability Partnership (LLP)|
|Ownership Structure||LLCs can have single-member or multi-member ownership structures. Members may be individuals, corporations, or other entities.||LLPs consist of partners, who can be individuals or entities. Partnerships are often formed by professionals, such as lawyers or accountants, with varying degrees of involvement.|
|Liability Protection||Members of an LLC enjoy limited liability, meaning their personal assets are generally protected from business debts, lawsuits, and legal liabilities. This protection helps safeguard personal wealth.||LLP partners also benefit from limited liability, which shields their personal assets from the partnership’s debts and legal actions resulting from other partners’ actions or negligence.|
|Management Roles||LLCs offer flexibility in management. Members can choose to manage the company themselves or designate managers to oversee day-to-day operations. This flexibility allows for a hands-on or hands-off approach to management.||LLP partners actively participate in the management and decision-making of the partnership. All partners typically have a say in the business’s operations and strategic direction.|
|Decision-Making Authority||Decision-making authority in an LLC is typically based on the terms outlined in the operating agreement. Members or managers hold decision-making powers, with the option to define voting rights and responsibilities.||LLP partners share decision-making authority, often on an equal basis. Major decisions, such as admitting new partners or amending the partnership agreement, are typically made collectively.|
|Investment Role||Members of an LLC may play various roles. Some members invest capital and take an active part in daily operations, while others may invest passively and have minimal involvement in management.||LLP partners are actively involved in the partnership’s business operations. They contribute capital and provide professional services as part of their partnership agreement.|
|Taxation||LLCs offer flexibility in taxation. By default, they are treated as pass-through entities, where profits and losses pass through to members’ individual tax returns. Alternatively, LLCs can elect corporate taxation.||LLPs typically provide pass-through taxation, similar to LLCs. Profits and losses flow through to individual partners’ tax returns, helping to avoid double taxation at the entity level.|
|Capital Contributions||Members of an LLC contribute capital to the company, which may or may not correspond to their level of involvement. This flexibility allows for varying levels of financial commitment.||Partners in an LLP also contribute capital to the partnership. While capital contributions may be unequal, all partners actively engage in the business, sharing both financial and operational responsibilities.|
|Duration of Entity||LLCs can have perpetual existence or a specified duration, depending on state laws and the terms outlined in the operating agreement. This flexibility allows for adaptability to changing circumstances.||LLPs often have a perpetual existence, but their duration can be specified in the partnership agreement. Dissolution or modification may require the agreement of existing partners.|
|Role in Decision Disputes||LLCs address decision disputes according to the terms of their operating agreement. This flexibility allows members to define dispute resolution procedures tailored to their specific needs.||LLP partners collectively participate in decision disputes. Dispute resolution procedures are typically governed by the partnership agreement and may involve mediation or arbitration.|
|Expansion and Withdrawal of Members||Members of an LLC can often sell or transfer their ownership interest, subject to the consent of other members or as specified in the operating agreement. This allows for changes in ownership over time.||LLPs admit or remove partners as per the terms defined in the partnership agreement or through mutual consent among existing partners. The process is often more structured due to professional requirements.|
|Role in Daily Operations||LLC members can choose their level of involvement in daily operations. Some may be passive investors, while others actively participate in managing the company, depending on the operating agreement.||LLP partners are actively involved in daily business operations and share management responsibilities. Their professional expertise is a critical component of the partnership’s success.|
|Profit and Loss Sharing||In LLCs, members determine profit and loss distribution according to the terms specified in the operating agreement. This flexibility allows for customized allocation based on members’ contributions.||LLP partners typically share profits and losses based on the partnership agreement. The allocation is often equal or proportional to capital contributions.|
|Control Over Business Decisions||Control over business decisions in LLCs is typically outlined in the operating agreement. Members or managers exercise control, and voting rights can be customized to accommodate various management structures.||LLP partners collectively share control over business decisions. Major decisions require the consent of all partners, fostering collaboration and shared governance.|
|Management Compensation||In LLCs, members may receive compensation based on the terms outlined in the operating agreement. Compensation can take the form of salaries, profit distributions, or other arrangements.||LLP partners may receive compensation as specified in the partnership agreement. Compensation often includes profit shares, management fees, or a combination of both.|
|Legal Requirements and Formalities||Both LLCs and LLPs require state registration and compliance with state regulations. Additionally, they must create an operating agreement (LLC) or a partnership agreement (LLP) to define governance and management.||State registration is a requirement for LLPs, along with the creation of a partnership agreement. The agreement outlines the partnership’s structure, roles, and responsibilities.|
|Role in Raising Capital||LLC members play a crucial role in providing capital. Some members may also take an active role in fundraising efforts, such as seeking external investors or securing loans.||LLP partners are actively engaged in fundraising efforts. Their professional networks and expertise often play a significant role in attracting capital and clients to the partnership.|
|Industry Applicability||LLCs are versatile and can be used in various industries, including service-based businesses, real estate, and retail. Their flexibility makes them suitable for both small businesses and large enterprises.||LLPs are commonly used in professional services industries such as law, accounting, and consulting. They are designed to accommodate the specialized needs of professionals in these fields.|
|Regulatory Oversight||The regulatory environment for LLCs varies by state. They are generally subject to less stringent oversight compared to publicly traded companies, offering a level of privacy.||LLPs may be subject to specific regulations and licensing requirements depending on the industry and jurisdiction. Compliance with professional standards is crucial.|
|Exit Strategies||LLC members can exit the company by selling their ownership interest, dissolving the LLC, or passing their membership interest to heirs or successors. Exit procedures are defined in the operating agreement.||LLP partners may exit the partnership through sale of their partnership interest, dissolution of the partnership, or retirement. Exit procedures are outlined in the partnership agreement.|
|Role in Succession Planning||LLCs have flexibility in succession planning. Members can specify their succession preferences in the operating agreement to ensure a smooth transition of ownership and management.||LLPs require careful succession planning, especially in professional fields. Partners need to plan for the transition of client relationships and the transfer of professional responsibilities.|
|Role in Estate Planning||LLC members can incorporate estate planning into the operating agreement. This allows for the transfer of membership interests to heirs or beneficiaries upon a member’s death or incapacity.||LLP partners can also integrate estate planning into the partnership agreement. Succession plans ensure the seamless continuation of professional services.|
|Access to Capital Markets||LLCs can potentially access capital markets by converting to a corporate structure. However, they are typically not publicly traded and often rely on private sources of funding.||LLPs are not designed for public offerings and generally rely on partner capital and client fees for financing. Access to capital markets is limited compared to publicly traded companies.|
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.
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 an 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.
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.
- 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.
- Limited Liability Company (LLC):
- A separate business entity with one or multiple owners known as members.
- Requires legal filings and fees for creation.
- Offers liability protection, similar to a combination of a partnership and a corporation.
- Members have limited liability for business debts.
- Taxation options include partnership, C corporation, S corporation, or sole proprietorship.
- Internal management and decision-making flexibility, defined in an operating agreement.
- Limited Liability Partnership (LLP):
- A general partnership between two or more people known as partners.
- Does not require legal filings.
- Favored by licensed professionals like architects, lawyers, and accountants.
- Provides some protection from partnership liabilities.
- Requires at least two founding partners, with specifics outlined in a partnership agreement.
- Limited liability for partner misconduct (in some states), but partners remain liable for business obligations.
- Differences Between LLC and LLP:
- LLC members have limited liability for debts, whereas LLP partners may have liability for partner misconduct but not for business obligations.
- LLCs offer more taxation options, including partnership, C corporation, S corporation, or sole proprietorship, while LLPs are generally taxed as partnerships.
- LLCs provide greater flexibility in internal management and decision-making through an operating agreement, while LLPs establish similar details in a partnership agreement.
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