LLP vs. LLC: Which is best for your business?

Before a small business opens its doors, many business owners face an important decision: Will they structure their business as a limited liability corporation (LLC) or a limited liability partnership (LLP)?

While LLPs and LLCs are similar in many ways, they also have some key differences. Both offer limited liability projections and taxation benefits, but they differ in management structures as well as the types of professions that can be involved in either business structure. 

Of course, with any type of business setup, laws and regulations can vary by state. So, while this article is a general guide on the definitions, similarities and differences between LLCs and LLPs, make sure you are familiar with the guidelines in your state before you make a decision. 

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What is an LLC?

The term LLC stands for “limited liability company,” which is a business structure that protects the owner from personal liability. 

In the event of a bankruptcy or lawsuit, the LLC designation protects the business owner’s personal assets – such as a home or private bank account. Any person or business entity can be a member of an LLC except insurance companies and banks. 

LLCs do not have to report taxes. Instead, the members of the LLC are responsible for reporting profits and losses on their own individual tax returns. 

LLC pros

• LLC members are protected from liability related to the company’s debts and potential legal actions. 
• “Pass through” taxation – meaning the LLC itself isn’t taxed, but profits and losses are passed through to the individual members’ tax returns. 
• No other business in your state can use your business name when you are a registered LLC. 
• Flexibility with profit distribution – LLC members aren’t required to distribute profits equally but can do so based on agreed-upon terms. 

LLC cons

• Restrictions vary by state. Depending on your state and profession, you may not be able to set up an LLC. For example, doctors can’t form LLCs in some states. 
• Can be pricier than other options. States will charge an initial formation fee, and some will charge ongoing, annual fees. 
• Self-employment taxes are higher with LLCs. Because the LLC itself isn’t required to pay taxes, the profit and loss tax burden falls to the LLC members. 
• In most situations, if a member dies or leaves the LLC, the LLC may no longer exist. 

What is an LLP?

LLPs, known as “limited liability partnerships,” are a business structure in which each partner has a limited amount of responsibility for the partnership’s debt. 

LLPs are typically used by business owners who work in professions that require a business license, such as accountants, architects, attorneys and doctors. With this structure, any type of lawsuit brought against one partner is the responsibility of that partner alone. The other LLP members aren’t liable for any malpractice, negligence or similar claims. 

State laws and regulations vary regarding LLPs, and they aren’t an option in every state.

LLP pros

• Like an LLC, the LLP structure protects its members from personal liability. 
• Protection from other members’ negligence. If one member is sued, the other LLP members aren’t liable. 
• LLPs offer the same business taxation benefits as LLCs. 
• Designed for individuals in the same profession. LLPs are a desirable structure for state-licensed professionals like doctors, lawyers and accountants. 

LLP cons

• LLPs aren’t available in every state. 
• More fees and paperwork. In many states, LLPs are required to pay franchise taxes in addition to filing fees. 
• Limited to certain professions. State-licensed professionals like doctors and lawyers are typically the only individuals that can form LLPs. 

What do an LLC and LLP have in common?

• Liability protection. The personal assets of all members in an LLP and LLC are protected in the case of legal action against the business. 
• Pass-through taxation. Both LLPs and LLCs offer taxation benefits to the business because tax burdens are passed down to the individual members themselves. 
• Multiple members. Both LLCs and LLPs allow for multiple members as part of the business structure. 

What are the key differences between an LLC and LLP?

• Management structure and responsibilities. The management responsibilities in an LLC are equally distributed. In an LLP, one person is designated the “managing partner” and potentially takes on more liability in the case of legal action. 
• Restrictions on formation. LLPs are typically restricted to state-licensed professions, like doctors, lawyers and accountants. LLCs can be formed by any person or entity other than banks and insurance companies. 
• Liability protection. LLCs offer a wider range of liability protection than LLPs. However, they only offer limited protection when it comes to the actions of other members. In an LLP, partners are fully protected from legal actions taken against other partners. 

Is an LLC or LLP best for your business?

When it comes to structuring your business as an LLP or LLC, you have several things to consider. 

When should you choose an LLC?

Limited liability companies are ideal for solo business owners, smaller companies and individuals with a significant amount of personal assets to protect. 

LLCs give new businesses more credibility because they have to be licensed through the state. They’re also attractive to business owners because of their liability protections, as well as their taxation structure – which protects the business itself from taxation and passes it through to the individual members. 

When should you choose an LLP?

Limited liability partnerships are ideal for state-licensed professionals, like doctors and lawyers. The partnership protects each partner from any legal action brought against another partner. 

Based on how the partnership is structured, LLPs are often ideal for situations in which one partner is willing to be more responsible for the day-to-day actions while others might prefer to be in the background. 

LLPs, like LLCs, are also attractive because of pass-through taxation. The partners themselves, not the business, take on profit and loss taxation.

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ZenBusiness

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Via ZenBusiness’ website

Free version available

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Lowest published package price

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Lowest published package price

$249

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Via Northwest’s website

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No

Lowest published package price

$39

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