When deciding how to structure your new business a key decision you may need to make can be between creating a Limited Liability Company (LLC) vs. a Limited Liability Partnership (LLP). The key reason individuals consider either of these business structures is due to the degree of liability protection provided by each. Understanding the differences between the two can ensure you make an informed decision when choosing to set up an LLC vs. an LLP.
While both LLC's and LLP's provide a degree of personal liability protection there are some significant differences that should be considered. These differences include:
- Liability Protection Provided: LLC's provide a higher degree of protection in terms of shielding personal assets from the operations and debts of the business. With an LLC there is a 100% break between the two and your personal assets are protected (except in certain legal situations where an owner has committed fraud or committed other crimes via the LLC). LLP's provide protection from the actions and debts of your fellow partners, with your personal assets not being protected from any actions or debts you may take on yourself. As such there is less protection of personal assets in an LLP.
- Taxation: LLC's and LLP's by default are both simply tax flow through mechanisms, where the revenue and expenses of the business are included in the personal tax returns of the individual owners. LLC's do have some additional flexibility, however, in that an election can be made to see the LLC taxed as a corporation (creating a separate tax entity from the individual owners). In some circumstances this can be done to reduce the overall taxes due.
- Ownership: Ownership of LLC's is very flexible and the actual owners are not required to actively manage and operate the business, giving the choice to hire a management team. Structures can also be created to allow certain owners to manage the operations of the business while other owners simply participate in profits. While ownership is flexible there are some types of companies that are specifically prohibited from being an LLC, banks and other financial institutions included.
LLP's are treated more like a general partnership with each owner having a vote in company decisions in proportion to their ownership of the LLP. This is a small distinction but owners in an LLP cannot be removed from the decision making process. Many states also provide limitations on who can be an owner of an LLP, often restricting ownership to certain professions like lawyers, accountants, or doctors.
- Paperwork: LLP's are far easier to form than LLC's in most states. To set up an LLC articles of incorporation and sometimes annual renewals and filing must be made related to the company. LLP's are typically only required to file a single form after the creation of the partnership.
LLC vs. LLP?
The first thing to consider when choosing between the two is the nature of your business and whether you have a choice between the two in your state. Generally an LLC will provide more protection of assets and advantages in terms of tax flexibility, so this is the choice made by many. For small and uncomplicated companies, an LLP can often be a better choice as it is faster and the benefits of an LLC won't be of great significant to the intended owners.