Advantages and Disadvantages of an LLC vs. LLP

By Brette Sember, J.D.

Advantages and Disadvantages of an LLC vs. LLP

By Brette Sember, J.D.

When you're setting up your business, you may be wondering if you should create it as a limited liability company (LLC) or as a limited liability partnership (LLP). In addition to the benefits and drawbacks to each of these types of business structure, there may also be laws in your state that dictate which you must use for your type of business.

Man looking at laptop

What Is an LLC?

An LLC is a business structure in which the owners, referred to as members, are protected from personal liability. LLCs can be formed by almost any type of business.

What Is an LLP?

An LLP is owned by the partners, who receive some degree of liability protection. LLPs are a common business structure for specific types of professionals, such as lawyers, doctors, and accountants, who by state law are not permitted to create an LLC.

Formation

Both LLCs and LLPs are formed when the company files formation papers with the state's business department, usually the Secretary of State. An LLC files articles of organization, while an LLP files a limited liability partnership agreement. There is generally no advantage to filing one type of document over the other.

Ownership

An LLC can have one or more members. There's no limit on how many or whether members are people or companies. An LLP, on the other hand, must have a minimum of two partners who must be individuals—not companies. Because an LLP has less flexibility when it comes to the number and type of members it can have, this may be viewed as a disadvantage.

Taxation

There are important differences in how an LLC and LLP can be taxed. An LLC has two options: it can select pass-through taxation, meaning the company pays no tax and the members report the profit or loss on their own returns, or it can elect to be taxed as a corporation, meaning it pays its own taxes as a company. An LLP can only use pass-through taxation.

An LLC's flexible tax status gives it an advantage. The fact that both types of entities can use pass-through taxation is a shared benefit.

Liability

Most companies set up an LLC or LLP to protect themselves from liability, but there are some differences in the types of protection available.

  • An LLC provides personal liability protection for the members. The members' personal assets are generally not accessible to creditors for debts of the LLC.
  • An LLP provides some liability protection, but most states require that an LLP choose at least one partner to be personally accountable for the business's financial obligations. Two or more partners may be able to share the liability to reduce the personal load.

An LLP has less overall liability protection than an LLC, which is a disadvantage. However, there is another important distinction:

  • In an LLC, members are protected from liability from the company's debts and obligations but are not protected from liability due to another member's negligence. If one member makes a mistake, all could be liable.
  • In an LLP, a partner is liable for her own negligence or that of someone she supervises, but she is not personally liable for the negligence of another partner. This is an important distinction between LLPs and general partnerships as well. In a general partnership, there is shared liability.

This is a distinct advantage for LLPs.

Operations

LLCs have more flexibility when it comes to operations, which can be an advantage. LLC members can choose to manage the LLC themselves or hire professional managers, while LLPs must have at least one managing partner, so at minimum one partner must be engaged in managing the business.

If you have the option to form an LLP or LLC, take the time to weigh the advantages and disadvantages and select the structure that is the best fit for your company.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.