Last Updated: March 16, 2022
If you’re starting a business, you’re probably wondering how to register it. Although there are many business entities you can choose from, two of the most popular options include a limited liability company (LLC) and a limited liability partnership (LLP). This article addresses the LLP vs LLC similarities and differences and the pros and cons of each.
What Is an LLC?
A limited liability company (LLC) is a business entity owned by one or more members. The formation of LLC consists of filing paperwork with the Secretary of State, which includes filing articles of organization, creating an operating agreement, and paying a filing fee. If you need help with the formation process of your LLC, you can contact one of the top LLC services and have them conduct the entire process for you.
In the partnership vs LLC, both have almost the same tax benefits. But an LLC, as a legal entity, shares the limited liability with corporations. Another distinguishing feature of LLCs is that they must have a registered agent (someone responsible for receiving mail on behalf of the company) listed on the formation documents.
Since a registered agent plays such a significant role in the company, make sure you find a high-quality registered agent. And before starting the process of registering an LLC, make sure you check the state statutes to ensure that you’re allowed to form an LLC for the type of business you have in mind.
|NOTE: LLCs are not subjected to double taxation, which is one of their most attractive features. Instead, all income from an LLC is reported on the members’ individual tax returns. If you’re an LLC member and need help with taxes, you should utilize high-quality tax software.|
What Is an LLP?
A limited liability partnership (LLP) is similar to a general partnership, with limited liability for one or more partners. But with the formation of LLP—as opposed to a general partnership—you need to file paperwork with the state. When comparing LLC vs LLP, both business entities are a sort of hybrid of corporations and partnerships. LLP partners and LLC members are entitled to a certain level of limited liability.
All LLPs are formed between two or more individuals who sign a partnership agreement in which the business partners agree to run the business together with predetermined responsibilities. The partners receive business earnings as distributive shares instead of as salaries—the shares are based on each partner’s initial investment. Before beginning the LLP formation process, you should check state law to see if it allows the formation of LLPs and if your company is compliant with all regulations.
|NOTE: All US states allow the formation of LLCs, but only 40 permit the formation and existence of LLPs. All types of businesses can be registered as LLCs, while a professional business is often registered as an LLP.|
|LLCs and LLPs both provided limited liability protection.|
|An LLC can choose how it’s taxed, while an LLP cannot.|
|The management structure of LLPs and LLCs is significantly different. LLCs can choose between two options, while LLP partners don’t have this choice.|
|State laws differ regarding the formation of the two entities.|
|Any business can be registered as an LLC, but only licensed professionals can form LLPs.|
LLC vs LLP: Similarities
When considering the limited liability partnership vs limited liability company discussion, there are some similarities. Each business organization is regarded as a pass-through entity for taxation purposes. The owners pay income taxes on their share of profits, reported on the owner’s individual tax form.
Even though both organizations don’t have a board of directors, they must abide by specific rules for conducting business, such as possessing management records and holding business meetings where all decisions will be recorded. Additionally, LLC and LLP owners alike must pay self-employment tax with their personal income taxes.
Fees for starting these two businesses are also similar, and both organizations must have an official document that describes the operations of the companies, as well as the decision-making process—for an LLP, this document is known as a partnership agreement, and for an LLC it’s an operating agreement.
|NOTE: Before starting a business, you should learn the difference between TIN and EIN. For example, a single-member LLC doesn’t need an EIN, while all LLPs must have one.|
LLC vs LLP: Differences
All companies operating in the US must be registered as a specific type of business, and all of these business types are somehow different. So, what is the difference between LLC and LLP? Note below the four most striking contrasts.
All businesses must detail their management structure on the formation documents. But LLPs and LLCs differ in their management structures—LLCs can be managed in two ways, and an LLP’s structure is more similar to that of a partnership.
- Member Management (LLC): An LLC can be member-managed by one or multiple members, which gives each member the role of an active manager and can serve as an executive in business operations. This is a suitable management style if the LLC is small and has limited resources, and has few members. This is the most common management style among LLCs and one of the advantages of LLC.
- Manager Management (LLC): A manager-managed LLC is managed by one individual who might be either a member or non-member. The manager, however, can’t make unilateral decisions regarding significant business operations. Additionally, the manager can be replaced, or the management structure changed. The manager-managed structure is advisable if the LLC is more complex and the members don’t have managerial skills or don’t want to participate in the management process. If you’re unsure how to manage your LLC, you can read up on the LLC management structure here.
- General Business Partnership (LLP): The management structure of an LLP vs LLC is different in that it requires active participation from the partners. Instead of turning to a board of directors or shareholders, the LLP considers the votes of only the business partners. As a result, an LLP partner has more power than an LLC member. But in some cases, one LLP partner is designated as a managing partner—taking on more personal liability—while the silent partners have more liability protection.
Limited Liability Protection
LLP partners can enter either a general or limited partnership. One of the advantages of limited liability partnership is that all general partners have an equal say in the business—as well as an equal liability—while limited partners (who only contribute capital) have less say in business operations and management, and proportionally, less liability.
Each LLP partner is responsible only for their own malpractice and negligence—they’re not responsible for another partner’s mistakes. But LLC members are all equally liable— each member is individually protected from legal action. So, for example, one member cannot be sued for business debt. But each member is held equally accountable if there is a lawsuit against the business.
In the LLC vs partnership consideration, both are regarded as pass-through entities (disregarded entities) by the IRS. As a result, the owners report business gains and losses on their personal tax form. In this way, they report the income as their personal income taxes instead of as corporate taxes.
LLCs can choose to be taxed as a corporation, but they are almost always regarded as disregarded entities, making an LLC more flexible than an LLP in terms of taxes. Both LLC and LLP owners are subjected to paying self-employment taxes.
Laws regarding limited liability companies differ from state to state. Some state laws are stricter concerning partner liability and their obligations in contracts. A closer look at a limited liability partnership vs LLC shows that some states don’t allow prospective business entrepreneurs to form LLPs. Some states restrict an LLP formation to select business and require a license. You should be familiar with the laws of LLCs and LLPs in the state where you want to base your business.
|NOTE: To register an LLC, you need to register a name distinguishable from other companies. It must also indicate that the company is an LLC. If you’re in doubt about the LLC name, you can learn how to choose your LLC’s name here.|
Who Benefits From LLPs?
The primary benefit of an LLP is liability protection, with added management control. So, this business entity is beneficial for those who wish to form a partnership but are cautious about reducing personal liability. They, however, are not wholly exempt from liability—they still need to answer for individual wrongdoings.
A comparison of LLP vs LLC shows that licensed professionals are the primary beneficiaries of LLPs. The most common LLPs are partnerships among attorneys, accountants, financial advisors, architects, and physicians. Additionally, some of the largest accounting firms in the US are established as LLPs, including the world’s largest law firm: DLA Piper. Other LLPs include dental offices, veterinarian’s offices, business consultancies, auditing firms, and real estate agencies.
|NOTE: Starting an LLC might be more beneficial in certain states than in others. You can learn more about some of the best states to form an LLC here.|
Who Benefits From LLCs?
Those who wish to protect their personal assets can benefit from forming an LLC since the only potential loss owners could face is the money they had invested in the company. But if the business you wish to register is profiting little, then the tax benefits that an LLC provides might not pay off, which is one of the few disadvantages of LLC.
Many well-known companies have started as LLCs, including Alphabet (best known for its subsidiary, Google). Additionally, most tech giants began as LLCs, including Apple, Microsoft, Facebook, and Amazon. Other successful LLCs include Nike, eBay, Blackberry, and Pepsi.
|NOTE: The IRS regards single-member LLCs as sole proprietorships for tax purposes while retaining the legal benefit of protection from liability, making LLCs one of the best business types available.|
Pros and Cons of LLCs
LLCs are a popular type of business entity. But besides the many positive aspects, they also have some drawbacks.
|Advantages of LLC||Disadvantages of LLC|
|LLCs can have only one member.||In some states, professionals cannot form an LLC.|
|Suitable for any type of business.|
|Pass-through taxation and tax flexibility.||LLCs cost more to operate than LLPs.|
|Simple and low-cost filing process.||Profits have to be reported as personal taxes.|
|NOTE: LLCs can choose to be taxed as a corporation. So, they have two options: taxed as an S corporation or as a C corporation.|
Pros and Cons of LLPs
Some states do not permit the formation of an LLP of this entity. Nevertheless, there are both upsides and downsides regarding this type of partnership.
|Advantages of LLP||Disadvantages of LLP|
|Two or more people can operate an LLP as a partnership.||Not permitted in every state.|
|Liability protection from neglect of other partners.||Allowed only for specific professions.|
|Pass-through taxation.||Filing requirements are more complicated.|
|Partners can leave and new ones can enter|
|NOTE: The most significant number of registered LLPs are law firms. By choosing this business type, a company doesn’t need to file a return (reporting losses or gains)—the partners report them on their individual returns.|
When comparing LLC vs LLP, it’s apparent that they both have their advantages and disadvantages. Before you decide on which one is better for your business, consider all aspects of each of these entities with your conditions, as well as with state law requirements.
An LLC is a better option if you’re not a professional and need more liability protection. But if you’re a licensed professional, an LLP is the better way to go—if your state allows it.
LLPs are an excellent choice for those who wish to run their business as a partnership, with added protection from liability. Additionally, partners have a more hands-on approach to the company’s management style and play a more significant role in the day-to-day business operations.
The primary difference between LLP and LLC is the level of protection from liability. An LLC member is better protected than an LLP partner. Another difference is regarding taxation—LLCs can choose they are taxed.
In the LLP vs LLC comparison, an LLP is ideal if two individuals wish to share equal responsibility, liability, and equal profits.