What’s the Difference Between LLC and LLP?
Learn how a limited liability company (LLC) is different from a limited liability partnership (LLP). Consider the best structure for your new venture based on the state, industry, liability protections, and tax status.
What are the similarities between LLC and LLP?
To fully grasp the difference between a Limited Liability Company (LLC) and a Limited Liability Partnership (LLP) it’s helpful to first understand the similarities. Both LLCs and LLPs have the ability to limit the liability of each member (LLC) or partner (LLP) for the actions of the business. All states allow the formation of LLCs, but only 40 states allow the formation of LLPs. Professionals, such as attorneys, accountants, and doctors often form an LLP.
LLC and LLP owners often have liability limited to financial investments. Unlike a sole proprietorship or traditional partnership, personal assets of the owner generally aren’t at risk due to actions of or lawsuits naming the company.
What are the differences between LLC and LLP?
While there are a few similarities, there are several differences between the two corporate structures. We’ll outline the differences here so you have the information necessary to decide between the two.
An LLC is a legal entity separate from the individual owners. As long as you keep business activities separate from individual activities, you can limit your liability. LLCs have flexibility to file taxes as a sole proprietorship, corporation, or partnership. If you file as a sole proprietor (single-member) or partnership (multi-member), the Internal Revenue Service (IRS) considers you a “pass-through” entity, meaning, for tax purposes, income “passes through” to your personal tax return.
LLCs can elect to file taxes as a corporation (S Corporation election), rather than a sole proprietor or partnership. To learn more about taxes and filing status by entity type, check out Small Business Taxes for Beginners.
LLPs provide similar levels of liability protection for partners (owners of the LLP). However, unlike the LLCs, LLPs must file as a partnership.
Choices by State
LLCs are flexible entities and contain one (single-member) or more (multi-member) owners. Only certain states allow LLPs, and in many cases states restrict owners to certain professions, such as:
Usually, a large firm, such as a law firm, chooses to form 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.
|LLC, Limited Liability Company
|LLP, 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.
In general, the IRS treats both LLCs and LLPs as pass-through entities. Profits and losses “pass through” to the member or partner personal tax returns.
The IRS considers single-member LLCs as sole proprietorships, and are subject to self-employment tax. Therefore, the owner (or multiple owners in the case of LLPs) 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. And you’ll need to keep in mind state-specific restrictions based on industry and profession.