LLC vs LLP
What is the Difference Between an LLC vs LLP
A limited liability company LLC is a type of business entity that provides the business with limited liability.
Limited liability companies are formed in one of two ways: as a corporation or as an LLC. The main difference between the two is how ownership is structured.
In a Limited liability company, the members are not legally considered to be owners, but rather partners in the company.
Also, each member has personal assets that are protected from claims by creditors, but the assets of the company itself may be at risk if there is insufficient protection for its creditors.
In the corporations, there is only one owner who owns all of the shares and who can use their personal assets to shield themselves from claims by creditors against the corporation’s assets.
A limited liability partnership LLP is a legal structure that allows for two or more people to carry on an activity as a business with unlimited liability protection.
A business entity may protect its owners from personal liability for the company’s debts, and in return for this protection, the owners are not personally liable for the nature of their activities.
There are some key differences between LLC vs LLP that you should be aware of.
- LLC can do business in any state it chooses to do business in.
- A limited liability company is not required to pay taxes on its income since it is not a separate entity from the owners.
- The company has an unlimited life span and can be dissolved at any time by the owners who are also the members of the LLC.
LLCs can do business in any state that they choose. This means they are not required to pay taxes on their income since it is not a separate entity from the owners.
The company may not be dissolved like a limited partnership.
- LLP must file a partnership tax return with the IRS every year and pay taxes on its income since it is a separate entity from the partners.
- LLPs have a set term for their life span which cannot be extended.
- A limited partnership must file a dissolution form with the IRS when it is dissolved.
Difference between LLC vs LLP in the US for Taxation and Legal Purposes
Limited liability companies (LLCs) and limited liability partnerships (LLPs) are similar in many ways but they have some key differences.
Limited liability companies are taxed as partnerships, while limited-liability partnerships are taxed as corporations.
Limited-liability partnerships have a single member, while LLCs have no limit on the number of members.
Limited-liability partnerships must have a designated managing partner, while LLCs can have no designated managing partner.
LLCs do not pay any tax on their profits, while limited-liability partnerships must pay the partnership tax.
Limited liability companies and limited liability partnerships both offer similar levels of protection for all members of the business structure.
The main difference between the two is that an LLC has pass-through taxation and an LLP does not.
This means that the LLC’s profits are taxed at the owner level, while the LLP’s profits are taxed at both levels – at the owner and partner level.
Because of this, LLCs are often easier for small business owners to form and operate.
Advantages of LLC:
- Contractually independent members who can limit their personal liability.
- No single member to be liable for the full company’s debts and liabilities.
- Members’ personal assets cannot be used to settle a business’s liabilities.
- No corporate income tax.
An LLC operating in the same state as its members, as a limited liability partnership, is subject to the same taxes and fees as a general partnership. However, an LLC can elect to be taxed as a corporation in order to avoid corporate income tax.
An LLC may also elect to be taxed as a corporation if it has more than one member in a state that does not allow LLCs to elect corporate taxation.
Advantages of LLP:
LLPs are a type of business entity that has some of the same characteristics as a corporation.
LLP is a partnership that can be formed by two or more individuals.
Limited-liability partnerships have limited liability protection, which means that members don’t have to worry about personal assets being attached to the business.
The advantages of LLP are:
- LLP members are not personally liable for any debts or obligations incurred by the company.
- The company does not need to be incorporated and does not need to file annual reports with the government.
- The company does not pay taxes on profits earned in excess of $250,000 USD per year.
- LLP members can only lose their share of ownership in the company if they withdraw from the partnership and agree with it to be dissolved; otherwise, they may lose their share of ownership through a buy-out or dissolution.
- LLP members can’t leave the company with a profit; they only get to keep their share of ownership in the company.
Owners who contribute to the business don’t have full liability protection because they could be sued for any amount owed by the partnership.
The risk that comes with this is that the owner could lose ownership of their company if they can’t pay off any debt from the partnership.
When a limited liability partnership is dissolved, an LLC or corporation must be formed to continue the business.
This will destroy all of the LLC’s assets in order to protect against members and/or owners being personally liable for debts incurred by this new corporation.
How to Find Out if You Need an LLC vs LLP
These two types of business entities have different levels of liability protection and taxation options.
LLCs are taxed as partnerships, while LLPs are taxed as corporations.
To find out which type of entity you need, consider these questions:
- Do you plan to raise capital through a public offering?
- Do you have more than one owner?
- Are you planning to operate your business in multiple states?
If you answered yes to any of these questions, an LLC is the best choice for your business.
If you answered no to any of these questions, consider an LLP.