Limited liability companies (LLCs) and limited liability partnerships (LLPs) are two common legal classifications for small businesses. While the two sound very similar, there are crucial differences between these structures, and it’s important to choose the right one when you’re establishing a company from a legal, tax and management perspective.
Here’s what you need to know about the difference between LLCs and LLPs and how to choose the best structure that suits your needs.
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Basic Definitions of LLP and LLC
Even though LLPs and LLCs both offer some form of protection from liability, it’s important to understand how each structure works and how they are different, so you can make an informed decision about how to set up your company. It’s always a good idea to get legal and tax advice before establishing any business entity.
What Is an LLC?
An LLC stands for a limited liability company. A major benefit of an LLC is the legal protection it offers. Because an LLC is considered a separate business entity, it creates a financial barrier between the owner and the company. This means that business creditors cannot go after an owners’ personal assets.
You can think of an LLC as a hybrid between a partnership and a corporation. It affords the owners the same legal protections as a corporation but typically requires less paperwork and fees. Business owners are called members, and an LLC can be formed by one or multiple members.
What Is an LLP?
A limited liability partnership is a formal structure that offers the partners at least some legal protection from the partnerships’ liabilities.
LLPs are common among licensed professionals such as accountants, attorneys, and architects. Licensed professionals aren’t allowed to form LLCs in some states, and an LLP offers a way to avoid unlimited liability for both business obligations and other partners’ negligence. . An LLP requires a minimum of two partners, and the specifics of business operations can be fleshed out in a partnership agreement.
Local Caveats for LLPs
Some states only allow certain professionals to open an LLP. In California, Nevada and New York, only certain licensed professionals such as accountants, attorneys and architects can operate as an LLP. Not every state allows the formation of an LLP, either. The definition and regulations of LLPs vary by state, including how limited liability is defined, and it’s important to keep in mind that not every state recognizes the LLPs of other states.
LLP Vs. LLC: Core Differences
In basic terms, the owners of an LLP are considered partners in an organization, while the owners of an LLC are members. As a result, there are key differences between how the limited liability protection is recognized, how an LLC and LLP are managed and how each structure is taxed.
Limited Liability Protection
In an LLC, the owner’s liability for business debts is limited to the amount the owners have put into the business (unless they’ve signed a personal guarantee on a debt). LLC owners also aren’t personally liable for the negligence or misconduct of their co-owners. However, LLC owners remain fully liable for their own negligence.
In some states, an LLP provides the same liability protection as an LLC. However in other states, the protection is more limited–partners’ aren’t liable for other partners’ negligence, but they remain fully liable for general business obligations. Some states require LLPs to designate a general partner who is fully liable, while the other partners have limited liability.
Management
Owners of an LLC are considered members, and an LLC can either be member-managed or manager-managed. LLCs have a great deal of flexibility in the way they structure management and decision-making within the company. An LLCs management structure and the rights and responsibilities of the members are detailed in its operating agreement.
The owners of an LLP are referred to as “partners.” An LLPs operating structure, profit-sharing and other rights and duties of the partners is specified in its partnership agreement.
Taxes
When it comes to setting up a business structure for tax purposes, an LLC can either be taxed as a sole proprietorship, a partnership, a C corporation or an S corporation. An LLP, on the other hand, can only be taxed as a partnership.
As a partnership, LLPs are considered “pass-through” entities in the eyes of the IRS, meaning the LLPs’ profits and losses are reflected on the partners’ personal income tax returns while the company itself pays no taxes. There may be additional differences in the way LLCs and LLPs are taxed at the state level.
Advantages and Disadvantages of an LLC vs. LLP
Frequently Asked Questions (FAQs)
What are the disadvantages of an LLP?
Since regulations for LLPs vary by state, the disadvantages will also vary by state. However, generally, the disadvantages of an LLP include the fact that LLPs don’t exist nationwide, only certain professions may qualify, inability to file taxes as an S corporation, and must have a minimum of two partners (including a managing partner).
How do you fill out an LLC application?
To complete your LLC application, start by navigating to your state’s Secretary of State website and locating the Business Division. From there, you should be able to find an LLC application (often under the “Business Formation” section), which you will likely be able to submit online or via mail, depending on your state. For more detailed information, check out our guide on how to set up an LLC.
How is an LLP formed?
The process of forming an LLP varies from state to state. You can find out about your state’s specific filing requirements on the Small Business Administration’s website.
How much does an LLC cost to register with ZenBusiness?
ZenBusiness offers LLC registration services starting for free and going up to $349 per year, plus state filing fees. Learn more about what it offers and how much its services cost in our ZenBusiness review.
How many different kinds of LLCs are there?
There are eight different kinds of LLCs that you can form. These include a single-member LLC for a one-person company; a multimember LLC, which can be either manager-managed or member-managed; a foreign LLC, which is set up outside of the country in which you reside (known as a domestic LLC); a series LLC (SLLC), which provides oversight to several smaller LLCs (only allowed in 18 states, Washington, D.C. and Puerto Rico); a low-profit LLC (L3C), which is a hybrid of a nonprofit organization and a for-profit corporation; an anonymous LLC, which allows the owner or owners to operate in the manner of a silent partner; a restricted LLC, which is a specific type of LLC that deal with the transferal of family assets like real property; and a professional LLC (PLLC), which is designed for companies whose members usually have to have regulatory board licenses like attorneys and doctors. Note that a PLLC is not allowed in California. A limited liability partnership (LLP) or professional corporation must be created instead.
