LLCs vs. LLPs: Which One Do You Need?
A limited liability company (LLC) is a flexible business structure formed by filing articles of organization, offering personal asset protection to its members. Conversely, a limited liability partnership (LLP) is a general partnership that grants limited liability protection to all partners. Both function as pass-through entities for tax purposes, preventing double taxation on business profits.
A limited liability company (LLC) is formed by filing articles of organization with your state’s secretary of state and paying the appropriate filing fee. LLCs must have at least one member.
A limited liability partnership (LLP) is a general partnership with limited liability protection for the partners. In most states, the partners must file a Certificate of Limited Liability Partnership with the Secretary of State’s office to change the business structure from a general partnership to a limited liability partnership.
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LLC vs. LLP
A limited liability company (LLC) is formed by filing articles of organization with your state’s secretary of state and paying the appropriate filing fee. LLCs must have at least one member.
A limited liability partnership (LLP) is a general partnership with limited liability protection for the partners. In most states, the partners must file an amended partnership agreement with the secretary of state’s office to change the business structure from a general partnership to a limited liability partnership.
LLC vs. LLP: Advantages and Disadvantages
Whether you form an LLC or LLP depends on a variety of factors. Consider which type of business you want to start, what level of liability protection you would like for business owners, and how the business owners will make decisions.
LLC members enjoy personal liability protection from the obligations of the business; however, members are not protected from liability for the actions of the other members. If a court finds that the corporation was not formed for legitimate business purposes, it will pierce the corporate veil and hold corporate officers liable for business obligations.
Similarly, LLP partners are not personally liable for the actions of the other partners. They will not risk their personal assets to repay business debts created because of the actions of other partners.
Tax Management of LLCs and LLPs
Both LLCs and LLPs are pass-through entities. The IRS does not treat pass-through entities as separate legal entities for tax purposes. The business itself is not taxed; owners report the income they receive on their personal tax returns. This eliminates the problem of double taxation.
LLC and LLP owners must pay self-employment tax on their share of the profits. The self-employment tax is equivalent to the taxes withheld for Medicare and Social Security on a traditional employment paycheck.
Liability Protection
Owners of LLCs and LLPs enjoy personal liability for the obligations of the business.
For example, if the business cannot repay a debt in a general partnership, the general partners pay the debt with personal assets. Owners in a limited liability partnership or limited liability company are not personally responsible for this type of debt.
Management Structure: LLC vs. LLP
An LLC’s operating agreement should address specific details about management. These details include:
- If the LLC is manager-managed or member-managed
- Members share in profits and losses
- The frequency of meetings (annual, biannual, etc.)
- The voting power of members
- Rights and responsibilities of members
- The number of shares each member can own
- Procedure for dissolving the LLC
Management structures for LLCs are either member-managed or manager-managed. Each member of a member-managed LLC is responsible for making daily decisions to operate the LLC. Manager-managed LLCs have one or more managers appointed by the board of directors to oversee the business’s day-to-day activities.
LLPs are either managed collaboratively by the partners or by one managing partner. Managing partners are often in charge of the daily business operations. Every partner in an LLP can participate in the day-to-day decision-making of the partnership.
The terms of the partnership agreement control an LLP, despite its management structure. A partnership agreement should include the following:
- Limited liability partnership name
- Share of profits and losses among limited liability partners
- Dispute resolution
- Adding partners
- Procedure to dissolve the partnership
Additional Questions About LLCs and LLPs?
An experienced local business lawyer can assist you if you start a business and are unclear whether the LLC or LLP structure is best. By choosing the proper business structure, you can avoid being liable for the company’s debts and achieve maximum tax savings.
Looking to start your own business? Use FindLaw’s DIY forms to get a legal business entity set up in minutes.
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LLC vs. LLP: Advantages and Disadvantages
Whether you form an LLC or LLP depends on a variety of factors. Consider which type of business you want to start, what level of liability protection you would like for business owners, and how the business owners will make decisions.
LLC members enjoy personal liability protection from the obligations of the business and members are protected from liability for the actions of the other members, if they did not personally participate. If a court finds that the LLC was not formed for legitimate business purposes, it will hold the members liable for business obligations.
Similarly, LLP partners are not personally liable for the actions of the other partners. They will not risk their personal assets to repay business debts created because of the actions of other partners.
Tax Management of LLCs and LLPs
Both LLCs and LLPs are pass-through entities. The IRS does not treat pass-through entities as separate legal entities for income tax purposes. The business itself does not pay income tax; owners report the income they receive on their personal tax returns. This eliminates the problem of double taxation.
LLC and LLP owners must pay self-employment tax on their share of the profits. The self-employment tax is equivalent to the taxes withheld for Medicare and Social Security on a traditional employment paycheck.
Liability Protection
Owners of LLCs and LLPs enjoy personal asset protections from the obligations of the business.
For example, if the business cannot repay a debt in a general partnership, the general partners pay the debt with personal assets. Owners in a limited liability partnership or limited liability company are not personally responsible for this type of debt.
Management Structure: LLC vs. LLP
An LLC’s operating agreement should address specific details about management. These details include:
- If the LLC is manager-managed or member-managed
- Members share in profits and losses
- The frequency of meetings (annual, biannual, etc.)
- The voting power of members
- Rights and responsibilities of members
- The ownership interest of each member
- Procedure for dissolving the LLC
Management structures for LLCs are either member-managed or manager-managed. Each member of a member-managed LLC is responsible for making daily decisions to operate the LLC. Manager-managed LLCs have one or more managers appointed to oversee the business’s day-to-day activities.
LLPs are either managed collaboratively by the partners or by one managing partner. Managing partners are often in charge of the daily business operations. Every partner in an LLP can participate in the day-to-day decision-making of the partnership.
The terms of the partnership agreement control an LLP, despite its management structure. A partnership agreement should include the following:
- Limited liability partnership name
- Share of profits and losses among limited liability partners
- Dispute resolution
- Adding partners
- Procedure to dissolve the partnership
Additional Questions About LLCs and LLPs?
An experienced local business lawyer can assist you if you start a business and are unclear whether the LLC or LLP structure is best. By choosing the proper business structure, you can avoid being liable for the company’s debts and achieve maximum tax savings.
Looking to start your own business? Use FindLaw’s DIY forms to get a legal business entity set up in minutes.
Related Resources: