Which Is Better: an LLC or an LLP?

by Lauren Miller

Many businesses that want the benefits of corporations without the complex tax rules and expensive startup costs involved with that type of entity choose to form as a limited liability company, or LLC, or a limited liability partnership, or LLP. Potential business owners must weigh the pros and cons of each structure when deciding which is better for their company. While LLC legislation is widespread, not all states have LLP laws.

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Ownership

An LLC can be made up of one or more members -- individuals, corporations or other LLCs. An LLP must have at least two partners. An operating agreement or partnership agreement sets forth the power, duties and responsibilities of LLC and LLP owners. The agreements may also stipulate how profits and losses are allocated, as well as any termination terms. An LLC may set a date of dissolution when the company is formed, or be perpetual. On the other hand, while an LLP may set a dissolution date, the life of the company is also dependent upon the lifespan of members. Unlike an LLC, an LLP is not a separate entity from its owners.

Management

LLC members can designate managers from amongst themselves to run the company, making it manager-managed. Members can also share the responsibility of running the company, making it member-managed. In an LLP, partners contribute to all aspects of running the company. However, a partner’s input is dependent upon his investment percentage in the company. These percentages may be set out in the partnership agreement. The partnership agreements for LLPs and operating agreements for LLCs may also set out the dispute resolution procedures if there are disagreements among owners.

Liability

One of the biggest differences between LLCs and LLPs is liability. LLCs have an advantage in that owners are generally protected from personal liability resulting from lawsuits, debts or other obligations of the company, including decisions made by other members or managers. However, members' personal assets are not protected from civil suits, also known as tort actions, as a result of illegal or unethical behavior. Partners in LLPs are personally liable for the debts and obligations of the overall partnership itself and also for their own business decisions in the partnership. However, the personal assets of partners in LLPs are protected from liability resulting from the actions of other partners or employees not under their direct control.

Taxes

LLC and LLP individual owners enjoy “pass through” federal taxation. Partners must file a Schedule K-1, form 1065. The IRS provides a detailed guide for partnership taxation rules. LLCs, on the other hand, do not have a federal taxation classification, and members can file federal taxes as a sole proprietor or as partner as if they were members of a partnership.