What Is the Difference Between an LLC and an LLP?

One of the many decisions a person needs to make when starting a business is what legal entity he or she wants the business to be. People may know that they want to set up business entities that will shield their personal assets should the business fail. However, they may not know whether a limited liability partnership or a limited liability company best suits their needs, or even what those things are. People should understand the differences between an LLP and an LLC, as well as the benefits and drawbacks of each entity.

Organization

LLPs operate similarly to general business partnerships in that the owners work together in the business, contributing labor, skill or money to make the business thrive. They all have the same general management rights and responsibilities.

The owners of LLCs are called "members," and they can choose to run the business themselves like in an LLP, or they can elect people to handle day-to-day affairs in their stead. As such, some view LLCs as offering more flexibility in management.

Limited Liability

The benefit that both LLPs and LLCs offer over traditional partnerships is that they protect the owners' personal assets from liability for lawsuits against the business. An LLP also protects owners from liability for the negligence and debts of their partners. An LLC offers members protections against the business' debts, such as any loans the business may have taken.

Taxes

LLPs are taxed like general partnerships, in a manner called pass-though taxation. The partners share the LLP's profits equally and pay taxes on the profits as part of their income taxes.

The default taxation mode for LLCs is also pass-though taxation. However, LLC members may elect to have the LLC taxed like a corporation, where the LLC itself pays taxes on profits it makes above the members' salaries. If the LLC then distributes profits, the members also pay taxes on them in the form of income tax, thus incurring the "double taxation" associated with corporations.

Constraints

Those starting businesses should be aware that there are some restrictions on what types of businesses may establish LLCs and LLPs. Many states will not allow law firms and accounting firms to operate as LLCs, and therefore they must choose the LLP entity. Insurance companies and financial institutions may not operate as LLCs, either.

Seek Legal Counsel

Setting up and running a business takes a lot of hard work and planning. If you are thinking of starting a business, contact an experienced business formation attorney who can help you form the business entity most suited to your needs.