After coming up with a great idea, one of the first major (and sometimes confusing) steps is deciding on what type of business structure to pick. This decision can be difficult, as there are several different business structures to choose from, each with its own advantages and disadvantages.
Here, we will review the Limited Liability Company (LLC) and compare it against the Limited Liability Partnership (LLP) to find the differences between the two.
What is an LLC?
A Limited Liability Company, or LLC, is a business structure that offers its owners personal liability protection, multiple tax options, and ease of administration.
One of the reasons LLCs are popular entities is due to the liability protection it provides their owners. This liability protection is available because the entity is formed with a state’s Secretary of State (or similarly named state office responsible for forming business entities). Liability protection is important as the owners are not liable for debts and actions of the LLC, which means creditors cannot come after the owner’s personal assets should the business be unable to pay its debts.
There is one caveat here in that should small business funding be obtained from a bank, the owners would likely provide a personal guarantee. With a personal guarantee, if the business could not pay back the bank, the owners would still have to pay it back.
Another key benefit is that an LLC can be taxed as either a sole proprietorship, general partnership, or corporation, giving the business owners some flexibility in how they want to be taxed.
The final main advantage of an LLC is that they are less administratively burdensome than other business structures, primarily the corporation. For example, LLCs do not have to hold annual meetings like a corporation and there are fewer formalities required for an LLC.
What is an LLP?
A Limited Liability Partnership, or LLP, is a business structure that is similar to an LLC in that it offers its owners personal liability protection. However, there are a few key differences between the two structures.
LLPs are primarily designed for businesses that offer services that are licensed by the state, like architectural, accounting, or law firms. An important benefit of an LLP is that it provides protection for each partner from professional malpractice lawsuits against another partner. So if one partner is negligent and causes the business to be sued, the other partners won’t have their personal assets at risk.
LLPs are also sometimes used for businesses where there are silent partners who only want to be investors with no management responsibility, though an LLC can also have silent partners.
Unlike the LLC that provides personal liability protection for all owners, each state has different levels of liability protection outside of acts of negligence. In some states, partners are responsible for the overall debts and obligations of the LLP while other states require there be one partner that has unlimited personal liability, and in other states, the LLP provides liability protection for all partners. Silent partners generally have full liability protection in all states.
Another key difference is how LLPs are taxed. An LLP is taxed as a partnership as a “pass-through” entity. This means the business itself does not pay taxes on its income, but instead, the profits or losses are passed on to the owner’s personal income tax returns.
What Is the Difference Between LLP and LLC?
Now that we have reviewed the basics of each legal entity, let’s take a look at the key differences between an LLP and LLC:
An LLC offers its owners personal liability protection from debts and actions of the business. An LLP generally only offers this protection to partners from other partners and to silent partners, however, each state is different.
Every state allows for the formation of an LLC, while most, but not all states allow for the formation of an LLP. Additionally, in some states, an LLC or corporation isn’t an option for businesses that provide professional services and require state licensing.
LLC and LLP Taxation
An LLC can be taxed as a sole proprietorship, partnership, or corporation, giving the business owners some flexibility in how they want to be taxed. An LLP can only be taxed as a partnership.
The benefit of the LLC being taxed as a corporation is that distributions can be made without being subject to the self-employment taxes (a combination of social security and medicare tax) of the LLP.
LLCs offer their owners personal liability protection from the debts and actions of the business, while LLPs only offer this protection to partners from the negligence of other partners and any silent partners.
PLLCs: Another Option to Consider
If you are a company that provides professional services and looking for a business structure that offers professional liability protection along with the option to be taxed as a corporation, you may want to consider a Professional Limited Liability Company or PLLC.
A PLLC is a special type of LLC that is only available to businesses that provide professionals that require state licensing, such as attorneys, doctors, accountants, architects, etc.
Like an LLP, a PLLC offers personal liability protection to its owners from the negligence of other owners in the business. But unlike an LLP, a PLLC can be taxed as a corporation, which may provide some tax benefits.
PLLCs are only available in certain states, so you will need to check with your state’s laws to see if this option is available to you.
Related: Learn more about the PLLC