What is the Difference Between the LLC and LLP?
To understand the difference between the LLC (Limited Liability Company) and the LLP (Limited Liability Partnership) forms of business entity structure, it is best first to understand the common characteristics. This is because the entity structures and methods of federal taxation are much the same for bothi.
The key for the commonalities is the LL part of the acronym. It is “limited liability” that is the major characteristic of these entities. They both pass through profits to the individual members to be filed on their personal returns. These profits are divided usually based on the ownership percentage of each member.
When first starting the LLC entity, the IRS will consider it a general partnership for tax purposes unless instructed to do otherwise. Through a Form 8832, the members can file for tax treatment as a corporation instead. Even if they go ahead with the IRS partnership designation, the business will be an LLC operating as a partnership.
The members will receive their share of profits according to an agreement usually based on ownership share, though there can be other arrangements. The key is that this is a pass-through entity for taxation.
Taking the Step to a More Formal LLP, Limited Liability Partnership
With all the commonalities, there is one major difference when forming as the LLP entity. It is a much more formal business arrangement. Depending upon the state where the entity is filed, there will be formal reporting requirements as well as other rules for the management, as well as some meeting requirements in many cases. The LLP structure is very popular, especially among professionals such as doctors and attorneys. It allows a group of them to work together for profits. It allows them to leverage assets such as offices and personnel.
The melding of their reputations and skills, often complementing each other, is what makes the LLP a successful operation. One example is a group of attorneys. Each can bring a legal specialty to the group: corporate law, family law, criminal, civil, etc. The LLP becomes a one-stop shop for those seeking legal services. The more prestigious the individuals in their legal specialties, the more impressive the group.
The LLP can have several junior partners. They can be apprentices of a sort, gaining experience and demonstrating their capabilities. They are working their way toward full partnership. The junior partners are not sharing in the profits and are paid salaries. They have not stake or liability in the partnership. There are other benefits of using junior partners. It helps the LLP to scale their operations using junior partners to free up full partners from detail and support work.
A great advantage for the LLP is the ability to bring in and let out partners. How their stake is resolved is in the original partnership agreement. The key is that the partnership can respond to business realities through adjusting partners. The legal LLP example could be the release of a partner with a legal specialty that is not contributing to growth. Whether it is the lack of demand for the specialty or the inability of that partner to bring in business, it can be resolved through changes in partners.
Those benefits of the LLP structure over the LLC makes it preferable for professionals while enjoying limited liability and pass-through taxation.