WHAT IS THE DIFFERENCE BETWEEN A LIMITED LIABILITY COMPANY (LLC) AND A LIMITED LIABILITY COMPANY (LLP)?
When deciding between LLP and LLC (Limited Liability Partnership versus Limited Liability Company), it’s critical to grasp the distinctions and similarities, as well as the benefits and drawbacks of each company structure. The taxes of each structure and the state-specific rules that control them in various ways are some of the significant variations.
This article will address the issue, “What is the difference between LLP and LLC?” and will assist you in making the best option for you, your partners, and your business.
Table of Contents
LLP vs. LLC
What exactly is an LLC?
An LLC is a sort of corporate structure that legally separates the business entity from its owners (who are referred to as “members” in the LLC). This more simplified structure protects owners’ personal assets from corporate debts while requiring less formal reporting and recordkeeping than a corporation. When it comes to taxes, LLCs are by definition pass-through businesses. That is, the corporation does not pay income tax, and gains are instead passed through to the owners’ personal tax returns.
However, LLCs have the option of instructing the government to tax them as a C company or a S corporation if they desire. While certain jurisdictions ban the formation of LLCs for certain licenced professions, this structure is well-suited for a broad range of enterprises.
What exactly is an LLP?
An LLP is a sort of corporate structure that separates the entity from its owners (LLP owners are referred to as “partners”). This structure also shields the owners’ personal assets from corporate debt. While LLP laws and regulations differ by state, this structure is often reserved for enterprises that need a professional licence or certification (e.g., law firms, accounting firms, and real estate agencies). An LLP must have at least two owners since it is a partnership. An LLP is similarly a pass-through tax entity by default, but unlike an LLC, it does not have the option of electing corporation taxation status.
Key Differences in the Formation of LLCs and LLPs
Formation
While both LLCs and LLPs are easier to incorporate than corporations, they do have some major distinctions. Some states, for example, limit the types of enterprises that may incorporate an LLP, while LLCs normally suffer no such limits. In reality, LLPs are not permitted in a handful of states.
Another distinction is the formation agreement of an LLP, which often must include each member’s protected personal assets as well as the liability protections each partner has if another partner performs a negligent conduct. This might make the LLP creation procedure more difficult.
Ownership
Some states limit LLP ownership to licenced professionals like physicians, accountants, and attorneys. These professions may not create a typical LLC in certain states. Most jurisdictions have minimal, if any, limits on LLC members, who may include other corporations, non-residents of the United States, trusts, and other entities.
While there is no limit to the number of owners an LLC or LLP may have, LLPs must have at least two and LLCs can only have one. Furthermore, LLC owners are referred to as “members,” but LLP owners are referred to as “partners.”
Liability
Both LLCs and LLPs provide limited personal liability protection, but not in the same way. All members of an LLC have some liability risk for the activities of other LLC members. Partners in an LLP are generally immune from malpractice actions launched against other partners.
Taxation
LLPs, which are taxed as partnerships, do not pay income tax at the corporate level. LLP earnings, on the other hand, are passed through to the partners, who pay personal income tax on their portion. LLCs may also be taxed in this manner, but they have the option of being taxed as a C corporation or a S company if they choose.
The Benefits of LLCs and LLPs
The benefits of an LLC vs. an LLP (and vice versa) may ultimately be determined by your company’s unique requirements. Depending on where you live, you may not have an option between the two. However, certain advantages of each structure apply regardless of your location. For example, LLCs provide more tax freedom, but LLPs are always taxed as partnerships by the federal government. As a result, whether you prefer the tax status of a C corporation or a S company, an LLC is a superior alternative. Depending on the state, LLCs may also need less documentation throughout the creation procedure.
In terms of liability, LLPs may occasionally give more personal protection than LLCs. Partners in an LLP are typically immune from malpractice actions made against other partners. In contrast, an LLC member may still be held accountable for the activities of other members up to the amount invested in the firm.
An LLC is a common example.
Because this form works effectively for a broad variety of enterprises, there are several instances of LLCs. An LLC may be the appropriate match for anything from a single-member consulting business to a multi-member landscaping company to a private equity investment.
An LLP is a common example.
LLPs often serve a smaller set of professions. Some states, in fact, restrict LLP ownership to licenced professionals. A legal firm, medical practise, accounting business, or real estate agency are examples of these.
PLLCs: Another Alternative to Consider
A professional limited liability corporation (PLLC) is another prospective business structure option that is not accessible in every state. The PLLC structure, although comparable to an LLC, is intended for firms that need licenced professionals. This implies that professionals such as physicians and attorneys who operate in states that do not allow them to create an LLC may choose to form a PLLC rather than an LLP due to the enhanced tax flexibility of a PLLC.
The unique laws of your state will play a significant role in determining if a PLLC is the correct form for your firm. Consider your sector, the degree of risk connected with your business, and the number of members who will require professional licences. Because PLLCs often need a little more effort in terms of structuring and preparing your operating agreement, the amount of labour required to stay in compliance with that agreement should also be considered.