LLC vs. LLP: Differences Between The Two Business Structures
When starting a business, one of the first decisions you'll need to make is what type of entity to form. Two of the most common choices are LLCs and LLPs. But what's the difference? And which option is right for you? In this blog post, we'll break down the key differences between LLCs and LLPs so you can decide which type of company is best for your business.
LLP Definition
When dealing with different business types, it is easy to get lost in the alphabet soup of entity names. An LLP is what is known as a Limited Liability Partnership ("LLP"). An LLP is a business structure in which two or more partners come together to run a business but with limited personal liability for the Limited Partners. This means that if the LLP is sued, the limited partners' personal assets are protected. LLPs are often used by professional service businesses such as law firms and accounting firms and certain Private Equity Groups.
When looking at a Limited Liability Partnership business entity, there are two types of partners, General Partners, and Limited Partners. The General Partners are responsible for the day-to-day management of the LLP and are personally liable for the debts and obligations of the business. The Limited Partners are not involved in the business's day-to-day operations and have limited personal liability.
LLC Definition
An LLC is an acronym for a Limited Liability Company ("LLC") is a legal entity that provides both the limited liability protection of corporations and the tax advantages of partnerships. While most states allow the creation of LLCs, some require that certain professional businesses, such as lawyers, doctors, accountants, etc. establish different business entities called a Professional Limited Liability Company ("PLLC"). You should consult with your state statutes to determine what kind of LLC you are allowed to form.
What is the difference between LLC and LLP?
There are a number of differences when looking at an LLC vs LLP. The most notable difference is that an LLP has two types of partners while an LLC only has one type, members. All partners in an LLP have limited personal liability, but there are different levels of liability for each partner type. In an LLC, all members have limited personal liability.
Another big difference is how the business is taxed. An LLP is taxed as a partnership, meaning all partners of the LLP share in the profits and losses of the company. In an LLC, it is possible to differentiate between the different types of members and even create different classes of ownership to share in the profits and losses of the business. Additionally, with LLC the IRS allows the owners to elect how the entity is going to be taxed. It is generally best to seek out legal advice when making a determination on the best tax treatment for your LLC.
Comparing LLCs and LLPs
Before starting your business formation, it is best to compare both an LLP and LLC. Here is a brief overview of how they compare:
- Taxation: An LLP is taxed as a partnership while an LLC can be taxed as either a partnership or corporation.
- Personal Liability: In an LLP, the limited partners have limited liability. In an LLC, all members have limited liability.
Taxation of LLCs and LLPs
A limited liability company can be taxed as a disregarded entity, a partnership, or corporation based on the number of members and whether the owners have made a "Check-the-Box" election. In contrast, a limited liability partnership can only be taxed as a partnership. Being taxed as a partnership, all income will be passed thru to the owners of the company and the profits will be reported on the owner's personal income tax returns.
Generally, both LLCs and LLPs are eligible for the qualified business income deduction under IRC 199A. Unfortunately, the IRS and tax code do not permit certain licensed professionals from claiming the deduction on their income taxes.
Liability protection
LLCs and LLPs protect against personal liability and lower the liability of any partner to the amount invested. In general, LLCs provide the most protection from liability. Regardless of whether you own and operate a multi-member or single-member LLC, the business entity itself will provide maximum asset protection. This means that the LLC members are not personally liable under law for the debts and obligations of the company.
In contrast, only the Limited Partners in an LLP are relieved from the business debts of the company. The General Partners will still be held liable for the business debts and obligations. This is one of the main reasons many licensed professionals choose to operate as an LLP.
Operating agreements
Both LLCs and LLPs should have an operating agreement in place. The operating agreement is a contract between the members or partners that outlines the rules, regulations.
What is the principal advantage of an LLP over an LLC?
Depending on the industry, management structure, and liability protection sought for the business, one of the key differences between LLPs vs LLCs is the level of protection from personal liability the business owners have. As stated earlier, all partners in an LLP have limited personal liability. However, there are different levels of liability for each partner type. In an LLC, all members have limited personal liability.
Additionally, LLPs tend to be better suited for businesses that require a high level of capital. by offering liability protection to limited partners, it is possible to start a business and take on investors while allowing you to remain as the company's managing partner.
What are 3 disadvantages of an LLC?
As discussed above, one of the main advantages of an LLP is the ability to limit liability for certain partners. Three other disadvantages of an LLC include the following:
- Self-employment taxes: LLC owners are subject to self-employment taxes, which can be a significant disadvantage.
- Limited life: LLCs have a limited life span and dissolve when an owner dies or leaves the business.
- Complexity: LLCs can be more complex to operate than other business entities.
Before starting a new business, it is important to speak with both your legal and tax professionals to decide what is the best structure for your new business.
Can an LLC have two owners?
Yeah. LLCs can be single members LLCs that have a single proprietorship. It may also be a multi-member LLC involving two or more shareholders. When an LLC is a single member, it is viewed by the IRS as a sole proprietorship for tax purposes.
Does getting an EIN to differ from LLC vs. LLP?
No. Applying for an EIN does not differ between an LLC vs. an LLP. The EIN is a nine-digit number that is assigned by the IRS and used to identify a business entity. The EIN is required for businesses that have employees, open a bank account, or file business tax returns.
You can apply for an EIN online, by mail, or fax.
In some very limited situations, it may be possible not to apply for an EIN, such as in the case of a single-member LLC. In this case, the owner can use their social security number instead of an EIN.
Ready to get started on forming your LLC or LLP?
Now that you understand the difference between an LLC and LLP, you can decide which business structure is right for your new business. If you're ready to get started, we can help you form your LLC or LLP quickly and easily. We'll provide you with all the resources and support you need, so you can focus on running your business.
We can accomplish in three simple steps:
Step 1: We file your business documents with the State Department
Our team collects all required documentation to form your business in accordance with the plans and deadlines specified at checkout.
Step 2: The State confirms your business.
The process will take several days or weeks, depending on how much time is needed and the State's internal processes.
Step 3: We send you the final business formation package
Once your business is confirmed by the State, we'll send you a complete business formation package that includes everything you need to get started. This includes your Certificate of Formation, Operating Agreement, and EIN. Get started today and have your LLC or LLP up and running in no time!
We can help you
Choosing between an LLC and LLP can be difficult choice. If you're not sure which business structure is right for you, we can help. We have a team of experienced professionals who can help you choose the right option for your business and file all the necessary paperwork. Contact us today to get started!
