Advantages & Disadvantages of LLC Vs. LLP

by Anna Assad

A limited liability company is owned by members and is a mix of the features of a corporation and partnership; the structure provides personal asset protection for members. A limited liability partnership is owned by partners and provides some of the same protection from creditors as an LLC. Both business types carry benefits and drawbacks, but you may be required to use a particular type in your area. Some states only allow a professional service business, like an accounting firm, to form an LLP.

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Taxation Designation

An LLP typically must file as a partnership for federal and state tax purposes. An LLC may file as a partnership, sole proprietor -- if the company only has one member -- or a corporation. Both an LLC and LLP can treated as a "pass-through" business entity for tax purposes, meaning the owners list company gains and losses on individual tax returns. An LLP itself is not subject to a federal income tax, but an LLC is if the company files as a corporation.

Liability

The personal assets of every member of an LLC are shielded from actions by the company's creditors, as with a corporation. An LLP may offer the same protection, but some states mandate at least one member of the partnership be accountable for business' financial obligations. The partners in the LLP typically decide which owner is liable for the business debts; the state may permit the liability to be spread among two or more partners.

Operations

Both an LLC and LLP are formed once the necessary papers are filed with the state business department. The state the business files in becomes the state of formation, and the entity is considered "foreign" everywhere else. The requirements for a foreign LLC to conduct business legally vary by state, but the standards for LLPs are generally universal. A business with dealings across multiple states may find the standard foreign LLP process beneficial.

Owners

An LLC can have one or more members; there is no limit on how many members the LLC can have. Members can be organizations, trusts, another business or individuals. An LLP must have at least two members at all times, and the members must be individuals.