A limited liability company (LLC) and a limited liability partnership (LLP) are two business models available to the creator of a new business. Both are highly popular in today's business sphere. Each model, of course, has unique characteristics to consider when determining which to use. Let's look at and compare these two models.
Characteristics of the LLC
The LLC is a relatively recent type of business entity. Entrepreneurs and small-business owners gravitate to this model because of its flexibility—both in terms of tax treatment and business operation.
The LLC is a "best of both worlds" creation: though not incorporated, it combines the benefit of limited liability with the tax structure and ease of formation that a partnership enjoys.
An LLC limits the liability of its owners, also called members, while also providing a flexible management model. Members may manage the company themselves or hire managers who are not owners. The model is well-suited to the solo entrepreneur, as a single member can comprise the company.
An LLC is formed under state law through the simple act of filing articles of organization. Thus, LLCs organize themselves according to statutes that vary from state to state.
The operating agreement also serves many LLCs as a key governing document, although most states do not require it as a filing, and states may even allow for an oral agreement. The reason you might wish to go ahead and draft a written agreement is to preserve understandings among the members about how they intend to operate their business.
Members of an LLC—except in particular situations, such as fraud or deception—enjoy protection from personal liability for the acts and debts of the LLC.
A single-member LLC may be taxed as a sole proprietorship or a corporation. LLCs with several members, by default, pay taxes as partnerships or, if the LLC has elected an S corporation status, as a corporation.
Characteristics of the LLP
The LLP—which, as the name suggests, requires at least two partners—exists under a state statute defining limited liability partnerships. The entity's formation requires a written partnership agreement, and it must abide by state reporting requirements.
All partners in an LLP can participate in the management of the partnership, and the firm can also include salaried junior partners with no ownership rights. The LLP's partnership agreement can enable the addition and the attrition of partners. Thus, the business can grow by adding partners who bring in new clientele. Moreover, professionals who share their operating costs may find they can achieve better financial success than they could if they operated singly.
The LLP model ensures that any one partner is generally not liable for the debts or negligent acts of another partner. This protects the personal assets of accountants, lawyers, or other professionals who do not wish to be held personally responsible for any other partner's malpractice. However, LLP partners will usually be responsible for the entity's own debts and agreements.
LLPs are taxed as partnerships. Profits and losses from the business pass through to the partners' personal income taxes. The LLP's partners receive untaxed profits and pay the taxes on their personal returns.
A Common Trait
Both the LLC and the LLP differ from a corporation in that neither of these models is owned by shareholders, who are taxed again on their distributions. However, the tax implications of both an LLC and LLP are important enough that they should be given due consideration when decided which entity type to form.
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