There are many similarities between an LLP (Limited Liability Partnership) and an LLC (Limited Liability Company). However, there are a few key differences one needs to examine in making a choice between registering a company as one or the other. State laws vary and it is possible that your type of business is restricted (between the two) to either the LLP or LLC, so knowing the laws of your state is also important.
Registering an LLP or LLC
Both the Limited Liability Partnership and the Limited Liability Company require filing Articles of Organization with the appropriate state agency. Different Applications are required, but both are rather simple to fill out, relatively short and largely require the same information.
Legal Protections
In an LLP, owners are referred to as Members and in an LLP, owners are identified as Partners. The limited liability of both an LLP and an LLC can expose the Members/Partners to a maximum of their investment in the entity, but they will typically not be held personally liable for the debts of the business. This extends not just to loans, but also liability for lawsuits such as personal injuries or breaches of contract. Some states do, however, require that one partner of the LLP not limit his or her personal liability. If this is the law of your state and you do not wish to expose one of the partners to liability, an LLC may be a better choice for your business.
Comparison of Tax Benefits
The tax benefits of an LLP and LLC vary, but they tend to be similar to each other in states that offer both. Unlike so-called corporate double taxation in which corporations must pay taxes once on their profits and then the owners must pay taxes again on any distributions, both LLPs and LLCs pay taxes only once. This is because both are pass-through tax entities; while the owners — partners or members — will pay income tax on their personal earnings from the company, the LLP or LLC itself will not.
Professional Services
There are a few states that disallow certain businesses – mainly professional service entities such as accounting or legal firms – to form an LLC. In those instances, of these two, an LLP would be formed. Likewise, some firms that plan to operate in multiple states select status as an LLP in case one of those states has the LLC restriction in place. Some states also offer the Professional Limited Liability Company or PLLC as an option as well. But because the PLLC is not available in every state, multistate professional firms may still opt for the LLP.
Finally, a few states restrict limited liability partnerships to professional firms, making the decision of LLP vs. LLC much easier. Remember, though, that just because an entity is restricted to your particular practice does not mean that the LLP or LLC is preferable for that type of practice.
Final Points
While the ultimate LLP vs. LLC decision is up to you and your attorney, selecting status as an LLC instead of an LLP may be preferable unless there is a specific reason to select LLP status. This is because the LLC is a bit more flexible, especially in terms of ownership restrictions. LLPs must have more than one partner and must operate like a partnership, while LLCs may have any number of members and may operate like sole proprietorships, partnerships, or S-Corps. Additionally, the LLP requirement of leaving one partner with unlimited liability sometimes defeats the main advantage of an LLP and LLC, and may cause discord among your partners.
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