What is The Difference Between an LLC and LLP?

Difference Between LLC And LLP

If you are thinking about starting your own business, you might find yourself with more questions than answers. How will you execute your branding strategy? Where will you set up an office or retail front? How big of a team will you need to hire? While those are certainly important questions to address at the outset, there are some additional formalities to consider. For instance, you will want to decide on the most appropriate legal structure for your business. You may find that a Limited Liability Company (LLC) or Limited Liability Partnership (LLP) is a logical choice for you, and while their names are similar, they do carry some fundamental distinctions. Before you move forward with your business plan, you should learn the difference between an LLC and an LLP.

In truth, LLCs and LLPs are very popular among entrepreneurs–and for good reason. These structures offer significant financial incentives coupled with liability protections that can appeal to nearly any business owner. Before you can decide which structure is right for you–or whether your business is eligible–you will want to know the facts about LLCs and LLPs.

The Difference Between an LLC and LLP: What Is an LLC?

One aspect that plays into the popularity of Limited Liability Companies is that they are available in all 50 states, and they are fairly easy to set up. The reporting requirements, though they vary from state to state, are also generally not burdensome. In this business structure, members are afforded “limited liability.” This allows for members of the LLC to shield their personal assets–homes, retirement accounts, etc.–from any legal action taken against the business. As this mitigates a fair amount of risk, it is an appealing prospect.

LLCs also have flow-through status with the Internal Revenue Service (IRS). In this formation, profits generated by the business are not taxed until they flow through to the members of the LLC, who then pay income taxes on their salaries. This tax scenario comes in contrast to certain corporate formations, which can effectively find themselves taxed “twice.”

Understanding the Concept of an LLP

A General Partnership (GP) occurs when two or more individuals go into business together. This can be, and often is, an informal arrangement. Sometimes, in fact, a GP is established with a simple handshake or a concise written agreement. You can think of an LLP as a more advanced version of a GP. In an LLP, two or more partners form a joint venture that also allows them to enjoy the “limited liability”of an LLC. LLPs also have pass-through status with the IRS, making them a no-brainer for many.

In an LLP, one or more partners can be found liable if they were deemed to have committed a malfeasance, while the other partners can shield themselves. For this reason, LLPs often make sense for dentists, doctors, lawyers, and the like. In fact, in some places, licensed professionals can only form LLPs and are precluded from creating an LLC. It is also worth noting that LLPs are not available in all states. 

Difference Between LLC And LLP

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If you would like to form an LLP or LLC, we can help. Explore our website to find the correct only forms for your state. You can also visit our FAQ page or email us with any questions you may have.