What is an LLC?
An LLC (Limited Liability Company) is an entity type formed under a specific statute in any state. It is neither a corporation nor a partnership but has some characteristics of each. The LLC is formed by filing articles of organization with the proper state office. Not every business can operate under an LLC. Typically, most states prohibit insurance and banking companies from forming an LLC.
What is an LLP?
An LLP (Limited Liability Partnership) is a special kind of general partnership. While a general partnership does not have to file with the state in order to commence business, an LLP must file with the appropriate state office and comply with the appropriate state rules in order to form and conduct business. Not all states permit the formation of an LLP so you must state the statutes of the state in which the formation is intended.
Advantages and Disadvantages of an LLC vs. LLP
One major advantage of an LLC is that there can be a single member while an LLP needs at least two partners. An LLC member may be a corporation. An LLC may conduct any type of business, except a few specifically prohibited types, while LLP members are usually of the same profession, such as doctors or lawyers. This is an important consideration when deciding what kind of entity to form.
LLP vs. LLC Main Differences
There are numerous differences between an LLP and an LLC. These differences relate to the management structure, liability protection, taxation, and state laws and regulations.
Management Structure
One major advantage for both types of business forms as opposed to corporations is the simpler management structure. Neither an LLC nor an LLP requires officers, directors, or shareholders. LLPs operate under a partnership agreement that defines each partner’s responsibilities, duties, and role in decision-making. Management is usually shared by members since they are in the same professional practice, but there must be a managing partner.
An LLC usually designates a managing member. That person must keep accurate business and financial records, maintain bank accounts, etc. This is an important role so that there is a clear record that distinguishes the finances of the LLC from those of the individual members.
Liability Protection
Like a corporation, LLCs and LLPs provide liability protection for members and partners.
The members of an LLC are not generally liable for the debts and obligations of the LLC. That means that they are not personally responsible for claims against the LLC. If an LLC is sued, only the business assets of the LLC are subject to the claim, not the individual assets, such as bank accounts, or other personal property or real estate, of the member. This protection is, however, not unlimited. If a member engages in fraud, or other illegal activity, both the member and the LLC itself may be held liable.
In an LLP, partners are only personally liable for their own negligence, not that of another partner. If, however, a partner’s negligence impacts the LLP, the non negligent partners share the loss to the business, limited to their investment in the business. Their personal assets are not affected.
Taxation
Unlike corporations, the Internal Revenue Service (IRS) does not recognize LLPs and LLCs as business entities separate and apart from their partners or members. Therefore, neither business form is subject to income tax. Both LLPs and LLCs are required to file what is known as an informational tax return.
In a partnership of any kind, they are what is known as a “pass-through entity.” This means that the partners report their share of the profits and losses of the business on their personal tax returns. LLCs may file as a partnership in order to avoid “double taxation”, that is a tax on the business as well as a tax on the members. If an LLC has one member, it is considered a sole proprietorship so the member is personally responsible for taxes on the business.
State Regulations
It is important to understand that LLPs and LLCs are formed under the laws of each state. Therefore, rules and requirements may differ from state to state.
In every state, the name of the LLP or LLC must not be the same or confusingly similar to that of another business entity. State websites have provisions for checking the availability of names. States have prohibited names, usually those implying some kind of financial service such as a bank, insurance, et al.
States also require a registered agent, which is a company or individual with an address on file with the state, for the receipt of the legal process and other official communications.
LLPs and LLCs must file an annual report with the state. Specific requirements such as the due state, the form required, and the fee vary from state to state.
Similarities Between LLPs and LLCs
LLCs and LLPs are similar in that they both provide, with certain exceptions, protection for members and partners from personal liability. They both have simpler management structures than corporations in that they are governed by the members and partners and not by a board of directors. And, very importantly, the LLC and LLP are not taxed directly but the members and partners pay taxes or declare losses on their individual returns. Neither form of business is exempt from a state’s annual reporting and registered agent requirements.
LLPs vs. LLCs. Which one to choose?
Only professionals can form an LLP so that is not available to all. Both allow people to form businesses that will limit personal liability and to avoid double taxation. Since the form of business selected will have an impact on liability, taxation, management, etc., it is best to first consult an attorney or financial professional. They can help to decide what is best for your particular situation.
