One of the critical things you need to accomplish when starting a small business is to decide what type of legal structure you want to use.
Limited liability companies (commonly referred to as LLCs) and limited liability partnerships (commonly referred to as LLPs) are the two most popular business structures. There are key differences between LLCs and LLPs that you must consider when making your decision.
Different states have different regulations governing LLCs and LLPs, so it’s important to do your research and choose the right structure for your business. This blog post discusses some of the key differences between LLCs and LLPs.
What Is an LLC?
A Limited Liability Company (LLC) is a popular business legal structure that helps protect you from personal liability for business decisions or actions.
An LLC is not a corporation but provides limited liability protection. This means that the owners of an LLC are not liable for the debts and obligations of the company.
You can think of an LLC as a hybrid between a corporation and a partnership. It provides its owners with the same legal protections as a corporation but with the flexibility and pass-through taxation of a partnership.
Typically, the business owners, in this case, are called members, and one or more members can form an LLC.
What Is an LLP?
A Limited Liability Partnership (LLP) is similar to an LLC, but it offers additional protection for the partners in the business.
Small businesses often use an LLP with multiple owners or partners. It protects each partner from personal liability for the actions of other partners in the business.
Each partner in an LLP is typically free to make decisions and enter into contracts on behalf of the firm, without putting their personal assets at risk.
The primary benefit of forming an LLP is that it limits each individual’s liability for any debts or obligations incurred by another partner.
LLC vs. LLP: Key Differences
Now that we have defined LLCs and LLPs, let’s discuss the key differences between them.
- Taxation
The main difference between an LLC and an LLP is taxation. The IRS considers an LLC a pass-through entity, meaning all profits and losses are passed through to the owners, who declare them on their personal tax returns.
An LLP, however, is subject to partnership taxation. This means the profits and losses are divided among the partners according to their ownership stake in the business.
- Liability
The other key difference between an LLC and an LLP lies in liability. As mentioned above, LLCs provide limited liability protection for members from debts or obligations incurred by other members.
But an LLP offers even more protection for the partners. Each partner in an LLP is responsible only for their own actions and debts, not those of other partners.
- Ownership
An LLC can be owned by one or more members, whereas an LLP must have two or more partners. This is why an LLP is often used by small businesses with multiple owners.
The owners of an LLC are generally free to transfer their interests and ownership rights in the company, whereas the partners of an LLP are typically not allowed to transfer or sell their interests without the consent of the other partners.
It means that the partners in an LLP must agree on any changes to the ownership structure, and all profits and losses have to be split according to the agreed-upon shareholdings.
- Management
LLCs can be managed by their owners (members) or by a designated manager. This means that the members are in control of how the business is run and can make decisions on behalf of the LLC.
An LLP must be managed by its partners, who must all agree on any major decisions within the firm. This can lead to disagreements and delays when it comes to agreeing on decisions that affect the business.
Summary
When deciding which type of entity to form for your business, it’s important to consider the key differences between LLCs and LLPs.
Taxation, liability protection, ownership structure, and management are all important factors to consider when choosing between an LLC or LLP for your business.
Make sure you research the different options and speak with a qualified attorney to ensure you make the right decision for your business.