Starting a new business can be exciting, but it is not without stress and risks. As you explore different entity options to limit your personal liability for the venture, LLC or LLP is worth considering.
However, make sure that you know all the advantages and potential pitfalls of both entities before taking a final decision. This LLC VS LLP article will help you know all the pros and cons of opting for any of them.
What is an LLP?
A limited liability partnership (LLP) is a type of legal entity that resembles the general partnership while protecting the personal assets of business partners against business liability.
In a general partnership, two or more people do business without any legal filings. However, to register as an LLP, you need to file certificates of limited liability partnership with the state. This makes an LLP is a separate business entity. You can also go through our free comprehansive guide on LLC.
What is an LLC?
Members in an LLC are protected from liability as an LLC is a separate legal entity from its owners.
LLP and LLC at a Glance
|Different Name than the Owner’s Legal Name
|In some states
Similarities Between an LLC and an LLP
Right to Use a Different Name than Owner’s Legal Name
Both LLC and LLP allow a business owner to operate their business under a different name than the owner’s birth or legal name.
Both LLC and LLP provide personal asset protection against business liabilities to members in the case of LLC and partners in the case of LLP.
Key Differences Between LLP and LLC
In simple words, the difference between LLP and LLC is that an LLC is a limited liability company, whereas an LLP is a limited liability partnership. However, the following is a basic explanation of the legal structures used to form a Limited Liability Company (LLC) and Limited Liability Partnership (LLP).
Most states restrict the LLP formation to licensed professionals while there are no such restrictions while forming an LLC.
Moreover, while forming an LLP, you need to mention the liability protection of each partner in case another partner commits a negligent act, or list down the protected personal assets of each partner on the certificate of limited liability partnership.
LLPs do not pay company-level income tax, rather they pay partnership income tax. The profit is pas through to partners paying personal income tax on their shares of profits.
There is no other choice of taxation for LLPs. On the other hand, LLCs have the flexibility to choose either to be taxed as a pass-through entity or as a corporation.
In some states, only licensed professionals, such as accountants, doctors, and lawyers can form an LLP. The non-licensed professionals can not form an LLP in those states. On the other hand, LLCs do not face such restrictions of ownership.
Other companies, non-U.S. residents, trusts, and other entities can be a member of an LLC. However, some states do not allow professionals to form a standard LLC. In that case, professionals form a professional limited liability company.
While there is no limit on the maximum number of owners for LLC or LLP, LLPs must have at least two.
On the other hand, LLCs may have just a single owner or as many as 100 or more. In addition, LLP owners are called “partners” while LLC owners are called “members.”
Though both LLCs and LLPs provide limited liability protection against lawsuits and other business liabilities, the liability is not identical.
In case of malpractice by a single owner, LLP provides general liability protection to other members. However, in LLC any malpractice of a single member puts all other members at liability risk.
In LLPs, just like a general business partnership, management duties are equally divided between partners. On the other hand, while setting up an LLC, members can choose between two management structures.
In the member management structure, LLC members can manage the business themselves, and each member shares responsibility for running the business.
Alternately, in the manager management structure LLC members can hire or appoint a manager from the members and/or non-members to manage the business.
In such a situation, the management team runs the business and the remaining members aren’t involved in business decisions.
How business decisions will be made should be outlined in the partnership agreement while management structure needs to be mentioned in the LLC article of organization.
LLC vs LLC: Pros and Cons
Pros of LLP
- LLP is a legal business structure.
- Owners and businesses are separate entities in the eyes of law.
- Limited Liability protection
- Flexibility in management structure
- Malpractice of one partner does not put other partners at liability risk
Cons of LLP
- No Tax Flexibility, LLPs are only taxed as a partnership
- Ownership restrictions
- Some states do not recognize LLP
Pros of LLC
- Legally, the business and the owner of the business are separate entities
- Personal asset protection in case of liabilities
- Easy maintenance
- Tax flexibility
Cons of LLC
- Malpractice of one member put all other members at liability risk
Who Should Form an LLP?
Business owners should choose LLP over LLC for the following reasons:
Flexibility in management structure: If business owners want flexibility in management structure
Protection from liability against other partners’ negligence: Other partners are generally not liable for the negligence of a single partner
Fewer formalities and easy to set up: LLPs have fewer formalities, no annual fees compared to LLCs and LLPs are easy to set up.
Who Should Form an LLC?
Business owners should choose LLC over LLP or any other business structure for the following reasons:
Liability Protection: In the case of business liabilities and lawsuits, the personal assets of the business owner are protected from any legal implication.
Tax Flexibility and Benefits: The LLC can choose to be taxed as a sole proprietorship, partnership, or corporation. Hence, an LLC can avoid pass-through deductions and double taxation. However, like other small businesses LLP can write off taxes on many business expenses.
Less Paperwork and Administrative Hassles: LLCs do not have to undergo much paperwork and administrative formalities like corporations.
Flexibility in Sharing Profits: Different business structures allow the distribution of profits based on the percentage of ownership interest or an owner’s capital contribution.
Generally, corporations pay dividends based on each shareholder’s proportion of ownership interest. In partnership, on the other hand, profits are shared equally.
However, LLCs have the flexibility to determine how profits will be distributed under the terms of their LLC’s operating agreement. Profits can be allocated based on the members’ capital contribution, or on the time and efforts that a member gives the LLC.
Most people choose to form an LLC as opposed to a LLP, because LLCs are less difficult and less costly to establish. That is what we recommend. In contrast, a LLP can be more costly and cumbersome to set up.
LLC formation services like ZenBusiness typically charge a flat-fee that covers the formation of the LLC and filing the initial paperwork (or other services such as registered agent, tax ID number, etc.). So, instead of DIY, you can save yourself time and money by simply hiring a reliable LLC formation service.
Aisha Noreen is an owner of a small business with more than 9 years of experience in the marketing industry. With the wisdom of an old soul, she always seeks innovation and mind-blowing ROI techniques. Her unique approach helped many small businesses thrive and she can surprise you in many ways as well. Believe it or not, her energy, passion, and creativity are contagious enough to transform your business and take it to another level.