Deciding between an LLP and LLC can be difficult unless you fully understand the differences between the two entities. There are many similarities between the LLP and LLC, but there are a few key differences you must examine in making your choice. State laws vary, and it is possible that your type of business is restricted to either the LLP or LLC, so knowing the laws of your state is also important. If you have any confusion on this point, speak with an attorney licensed to practice law in your jurisdiction. The Secretary of State’s office may also be able to provide some insight.
LLP vs LLC
Both the Limited Liability Partnership and Limited Liability Company require filing an Articles of Organization with the appropriate state agency — typically the Secretary of State or a subsidiary. States that offer both entities will use different forms for LLPs and LLCs, but the information required is similar. The business name of the LLP or LLC, its business activities, and your contact information are all required. Beyond that, states vary. You will typically not need to fill out more than one or two pages on a standard form to create a limited liability partnership or limited liability company.
LLP vs. LLC: Legal Protections
Both the LLP and LLC offer limited liability protections, meaning that the owners of the companies (called “members” in LLCs or “partners” in LLPs) will typically not be held personally liable for the debts of the business. This extends not just to loans, but also liability for lawsuits such as personal injuries or breaches of contract.
Some states require that one partner of the LLP not limit his or her personal liability, meaning one person will be responsible for the debts of the business. If this is the law of your state and you do not wish to expose one of the partners to liability, an LLC may be a better choice for your business. If you’re not sure where your state stands on this law, contact your Secretary of State.
LLP Tax Benefits vs. LLC Tax Benefits
The tax benefits of an LLP and LLC vary, but they tend to be similar to each other in states that offer both. Unlike so-called corporate double taxation in which corporations must pay taxes once on their profits and then the owners must pay taxes again on any distributions, both LLPs and LLCs pay taxes only once. This is because both are pass-through tax entities; while the owners — partners or members — will pay income tax on their personal earnings from the company, the LLP or LLC itself will not.
LLP vs. LLC: Professional Services
Some states do not permit some businesses — most notably those that perform professional services such as accounting or legal aid — to be formed as a limited liability company. Though some do, many professional service companies opt to form as a limited liability partnership. This is especially useful for firms who plan to operate in multiple states and do not want to deal with forming as a different business entity in different states.
Some states also offer the Professional Limited Liability Company or PLLC which is an option as well. But because the PLLC is not available in every state, multistate professional firms may still opt for the LLP.
Finally, a few states restrict limited liability partnerships to professional firms, making the decision of LLP vs. LLC much easier. Remember, though, that just because an entity is restricted to your particular practice does not mean that the LLP or LLC is preferable for that type of practice.
LLP vs. LLC: Final Points
While the ultimate LLP vs LLC decision is up to you or your attorney, my personal preference would still be for the Limited Liability Company over the Limited Liability Partnership unless you have a specific reason to favor the LLP. In other words, if you’re having trouble deciding between the LLP and LLC, my default choice would be the LLC.
This is because the LLC is a bit more flexible, especially in terms of ownership restrictions. LLPs must have more than one partner and must operate like a partnership, while LLCs may have any number of members and may operate like sole proprietorships, partnerships, or S-Corps. Additionally, the LLP requirement of leaving one partner with unlimited liability sometimes defeats the main advantage of an LLP and LLC, and may cause discord among your partners.
Though if your state requires your type of business to form an LLP, or if one feature of an LLP is desirable for you, the limited liability partnership is still a great entity. As always, if you are having difficulty making the LLP vs LLC decision, an experienced business lawyer can help.