What is the Difference Between an LLC and an LLP?

The choice between an LLC and an LLP can be difficult. Both business entities have certain advantages and disadvantages. Depending on your business, goals, and needs, one business entity may be preferable. If you are having difficulty choosing between an LLC and an LLP, a DC fractional general counsel can help.

What is an LLC vs. an LLP?

A Limited Liability Company or LLC is a business entity organized under state law. The laws governing LLCs may vary slightly by state. The business is owned and managed by members who have limited personal liability as long as the members and the LLC maintain separation between business assets and personal assets. LLCs can have one member or multiple members. Many small business owners who do not want to remain sole proprietors or groups who do not wish to become partners choose an LLC as their business structure.

A Limited Liability Partnership or LLP is a partnership in which each partner is a general partner. LLPs are common business structures for professional firms, such as accounting firms and law firms. In an LLP, all partners can participate in the management of the business. However, the partners are somewhat shielded from the negligence, omissions, malpractice, errors, or wrongful acts of the other partners in the LLP.

“Many small business owners who do not want to remain sole proprietors or groups who do not wish to become partners choose an LLC as their business structure.”

— Steve Thienel

Similarities Between an LLC and an LLP

Several similarities that LLCs and LLPs share make these types of business entities popular for many business owners.

Corporations have strict formalities and record-keeping requirements that must be followed to maintain liability protection for the shareholders. LLCs and LLPs avoid these formalities while enjoying some of the liability protection afforded to corporate shareholders.

Both entities combine the liability protections offered by incorporating with another business entity. LLCs combine many of the advantages of a sole proprietorship or general partnership with the liability protection of a corporation. LLPs combine the advantages of a general partnership with the liability protection of a corporation. However, in both cases, personal liability protection is limited, unlike the unlimited personal liability protection enjoyed by shareholders of a corporation.

LLCs and LLPs are also treated as pass-through entities for tax purposes. Corporations are subject to double taxation. The corporation pays taxes on profits at a corporate rate, and shareholders pay taxes on dividends they receive. The profits of an LLC and an LLP “pass-through” the company to the members or partners who report the income on their personal tax returns. A single-member LLC is treated as a sole proprietorship for tax purposes, while multi-member LLCs and LLPs are treated as partnerships for tax purposes. However, both entities can choose to be taxed as a C or S Corporation, if they meet the qualifications for that election.

Differences Between LLCs and LLPs

Even though LLCs and LLPs have some things in common, they do have several differences that make them unique business entities.

An LLC can be formed with just one member. However, an LLP must have two or more general partners. Members of an LLC can include individuals or other business entities, but a partnership may only include individuals. Some states restrict certain professions from forming an LLC. For example, some states do not allow lawyers or accountants to form LLCs.

The management style for the two business entities varies. LLC members can manage the company, or the members can hire a manager, hire a management team, or appoint one or more members to manage the LLC. On the other hand, the management duties for an LLP are divided equally between all partners. A partnership agreement dictates how business decisions are made for the LLP.

LLCs and LLPs offer members and partners, respectively, limited personal liability. Members and partners are protected from personal liability for company debts. However, if a member commits an error or wrongdoing that results in liability for the LLC, all members could be held liable. In a partnership, partners are not liable for the negligence or mistakes made by other partners.

Choosing the Best Business Entity for Your Company

There are pros and cons associated with each business entity. The choice of a business entity for your company significantly impacts several areas of business operations, including taxes, daily operations, management, liability, financing, and transfer of ownership interest. Before formally registering your company as an LLC or an LLP, discuss the pros and cons of each entity with an experienced business law attorney.

Seek Legal Advice from a DC Fractional General Counsel

A DC fractional general counsel helps you with all phases of business formation, including determining whether an LLC or an LLP is the best choice for your company. Additionally, a DC fractional general counsel provides valuable legal advice regarding issues related to forming a new business, such as taxation, drafting contracts, employment matters, regulatory compliance, insurance, drafting operating agreements and partnership agreements, and licensing.

As your business grows, you may find that you benefit from ongoing legal counsel. Contact experienced business attorney Steve Thienel today. A DC fractional general counsel can provide the same legal services as a full-time in-house attorney at a fraction of the cost.