The startup entrepreneur faces many choices, not the least among which is whether to choose a form of corporate existence and if so, what form to choose. In recent years, the limited liability company (LLC) and the limited liability partnership (LLP) have emerged as alternatives to traditional incorporation. The LLC and LLP forms are similar in many ways, but differences exist that may make one or the other more suitable for a given business.
Both LLCs and LLPs are governed by the laws of individual states, which dictate the filing requirements for both corporate forms. Generally, LLCs and LLPs both are required to file articles of organization with the secretary of state or similar official and pay the associated filing fee. This fee ranges anywhere from under $50 to over $500, depending on the state. The state may also require the simultaneous filing of an operating agreement for an LLC and a partnership agreement for an LLP, although this is not required in all jurisdictions.
LLCs and LLPs can generally have an unlimited number of owners, who are called "members" in LLCs and "partners" in LLPs. An LLP, however, must have at least two partners, whereas an LLC can have a single member who owns everything and conducts business through one or more employees. An LLP can have employees, as well, but there can be no solely-owned entities.
Both LLCs and LLPs are formed to provide the owners with some sort of protection against suit due to the torts of other members, partners or employees. The difference is that the protection offered to LLP partners may be limited to specific torts, such as negligence, but leave them open to suit for partners' other wrongs such as breach of contract or fraud. Additionally, some states require that each LLP have a "general partner" who has unlimited liability.
Both LLCs and LLPs provide their members with "pass-through" tax treatment, which means that the business's profits flow through the company and onto the owners' individual tax returns. This helps members and partners avoid the pitfalls of double taxation that exist with respect to corporations, where the corporation pays corporate tax on its earnings and the shareholders then pay tax on their dividends. Pass-through taxation is a major benefit to organizing as an LLC or LLP as opposed to choosing a traditional corporation.
Why Choose Either
The LLC and LLP are similar and the reasons for choosing one over the other deal chiefly with variations in the law from state to state. Potential partners may not wish to designate one as a general partner with unlimited liability, so in states requiring an LLP to have a general partner, these individuals may organize as an LLC. Certain professionals, such as doctors and lawyers, may not be eligible for LLC organization in every state. As such, a professional organization that could operate as an LLC in one state but not in another may choose the LLP form to enable it to operate in the other state.