What is the Difference Between an LLC and an LLP?

Similarities Between the LLC and the LLP

Before the differences, there are similarities between the LLC, Limited Liability Company, and the LLP, Limited Liability Partnership. Both the LLC and the LLP have the ability to limit the liability of each member (LLC) or partner (LLP) for the actions of the business entity. All states allow the formation of LLCs, but only 40 states allow the formation of LLPs. The LLP is often formed by professionals, such as attorneys, accountants, etc.

The financial liability of members or partners is solely their investment in the business when it comes to the actions of the business. Their personal assets are not at risk from actions by the company or lawsuits naming the company. This is unlike the sole proprietorship or the regular partnership, as some or all the assets of the owners or partners are at risk in those entities.

Differences Between the LLC and the LLP

While there are a few similarities, there are several differences between the two business structures. We’ll outline those here so that you have the information necessary to decide between the two if this type of structure is of interest or best for your business.

The Basics

The LLC, Limited Liability Company, is a separate legal entity, and the owners, similar to a corporation, are protected from liability for operations and actions of the company. It is a pass-through entity, similar to the way profits are passed through for sole proprietorships and partnerships.

The LLP, Limited Liability Partnership, offers some level of protection from liability for partners. It is not a separate entity like the LLC for tax purposes, so both profits and losses are passed through to the partners.

Choices by State

ally, LLCs are more flexible, able to be formed by a person, multiple people, or a business. LLPs, not authorized in every state, can be limited as well by who can form them. As an example, they’re often restricted to professionals, such as:

  • Attorneys
  • Accountants
  • Doctors
  • Engineers
  • Architects

Usually, a large firm, such as a law firm, will choose to form as an LLP to give them the ability to register in every state that allows LLPs.

Legal and Financial Liability Protection

Though both the LLC and the LLP offer some protections for members or partners, there are crucial differences that make the entity decision necessary for liability reasons.

LEGAL PROTECTIONS
LLC, Limited Liability CompanyLLP, Limited Liability Partnership

Members of an LLC are protected from the debt or liabilities of the business.

However, members are not protected from liability for errors or omissions of other members.

If one member of an LLC makes an error or has some legal liability for an action for the company, all members are at risk.

Partners in an LLP are protected from legal liability of actions of other partners.

Each partner in an LLP is personally liable only for their own actions or negligence, or for actions or negligence of someone working under their supervision.

It depends on the state where the LLP is registered, whether a partner can be held liable for some debts or LLP financial obligations.

Tax Implications

In general, both the LLC and the LLP are considered pass-through entities by the IRS. Profits and losses are passed through to the members or partners for taxation on their personal tax returns.

A single-member LLC is considered a sole proprietorship with regards to self-employment taxes. The member must pay Social Security and Medicare taxes.

In deciding between the two entity structures, it’s a balance between liability protection and the number of members for taxation reasons.

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