Limited Liability Partnership vs. LLC in California

limited liability partnership vs llc

As the needs of the market and, more specifically, those of your consumers evolve, so too must your business. Maybe you started out from humble beginnings, running your business out of a small home office in your spare time. Perhaps you have been fortunate, and your business has grown to become a profitable, full-time pursuit. As you adapt your business to changes in demand and revenue, you may decide that forming a limited liability partnership (LLP) or a limited liability company (LLC) is a sound maneuver. If you are at such a crossroads, understanding the benefits of a limited liability partnership vs. an LLC is paramount.

California, with its warm weather, nearly endless coastline, and general scenic beauty is an ideal destination for many. For businesses, it is also a major commercial hub. The Golden State boasts the largest economy in the U.S., and with a gross state product (GSP) in the trillions, it is also bigger than those of many other countries in the world.

With a significant amount of money to be made, and many booming industries providing livelihoods for millions, California has fairly tough regulations and stringent guidelines for business owners. Since each state has its own rules about LLPs, LLCs, S-Corps, and more, you will want to understand just how California’s laws apply to your business.

limited liability partnership vs llc

Getting To Know the Nuances of a Limited Liability Partnership

When combing through business listing directories, or even observing certain advertisements, you may have noticed the letters “LLP” following the name of a business. This stands for “Limited Liability Partnership”, and it is used to establish a business as a legal entity.

An LLP is essentially a more formal extension of a general partnership. Whenever two or more people go into business together, even if it’s only consummated via handshake, that can be described as a general partnership. What an LLP does is add a layer of legality to that relationship, while affording limited liability to the partners involved.

So, just what is the concept of “limited liability”? In simple, practical terms, this legal idea means you are personally shielded from the liabilities incurred by your business. Typically, this means lawsuits and bankruptcy. What separates an LLP from an LLC is that it does not completely absolve partners of liability. In some cases, provided a partner contributed a provable degree of negligence, they can be found liable in legal matters. 

LLPs are commonly used by professionals who provide a service. Think: Doctors, lawyers, architects, accountants, and dentists. In the state of California, such licensed professionals are actually prohibited from forming LLCs and must opt for creating LLPs instead.

What is a Limited Liability Company?

On a very basic level, a limited liability company is a legal entity, which similarly to a corporation, protects its owners from liability. It is different from an LLP in that it offers much more protection in this regard. An LLC is also subject to fewer rules and less bureaucratic red tape than an S-Corp or C-Corp.

An LLC is also granted “pass-through” status by the Internal Revenue Service (IRS). This means that it is not taxed as a business. An LLP enjoys similar tax benefits, though it does have nuances of its own. Before you opt for an LLP or LLC, consulting with a seasoned tax attorney can help you better understand your options. 

Limited Liability Partnership vs. LLC: Which is Right for You?

So, how can you determine which option is right for you? On a fundamental level, both an LLC and LLP are going to be more practical for smaller businesses. Establishing a corporation is a much more involved process and is typically reserved for larger companies. Perhaps one day your business will be successful enough to make that consideration, but if you are a small enterprise owner, the tax benefits of an LLC or LLP likely make more sense.

One additional–and quite important–distinction is that an LLP can protect you from the actions of another partner, while an LLC cannot. While California requires most professionals to utilize the LLP designation, it is with good reason, as it can protect you from suffering the consequences of actions of negligence by other business partners.

We Can Help You Submit Your Documents Today

If you are ready to form an LLC or LLP, this process must be completed through the California Secretary of State’s office. Instead of navigating large stacks of paperwork to do this, work with us at the Corporation Center. We offer easy-to-fill online forms for creating LLCs, LLPs, and more. We also rely on an SSL-encrypted web portal to transmit your personal information, so you can rest easy knowing that your data is being securely processed. To learn more about how we can help you grow your business, contact one of our experienced customer service representatives today.