Difference Between LLP, LLC, and PC

By Ari Mushell, J.D.

Difference Between LLP, LLC, and PC

By Ari Mushell, J.D.

You have a business idea and formulated a business plan. After research and careful planning, you are ready to start your business and want to harness the limited liability protection that your state affords businesses incorporated there. Your options are a limited liability corporation (LLC), a limited liability partnership (LLP), and a professional corporation (PC).

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LLC Overview

The LLC has several advantages that make it suitable for smaller companies. The most important advantage is that it provides its owners, called members, with limited liability. That means that members' personal assets are legally distinct from the LLC's assets. So, in the event someone sues the LLC, member assets are shielded from the proceeds of the lawsuit.

An LLC also provides members with pass-through taxation, which means that the LLC does not pay taxes on profits earned. Instead, profits "pass through" to the members, who pay personal income taxes on profits distributed by the LLC. This tax arrangement avoids the double taxation experienced in corporations, in which the corporation pays taxes at the corporate level and then employees and shareholders pay taxes at the personal level.

Another advantage is that an LLC has minimal paperwork requirements, which makes launching an LLC rather easy.

An LLC can have multiple members or as few as one member. As such, it is advantageous for someone with a small home-based business to incorporate as an LLC.

LLCs also provides members with the flexibility to create a centralized management structure whereby members appoint one or more managers. As such, while an LLC has minimal formal filing requirements, it may, for practical reasons, feel the need to draft a detailed operating agreement outlining members duties, control, and profits, which may carry a significant expense, depending on circumstances.

LLP Overview

Although similar to an LLC in that it has limited liability, passes through its taxes, and is relatively easy to form, an LLP differs in its requirement of having at least two members who constitute the partnership. As the name suggests, an LLP is a partnership, which means, in contrast to an LLC, that there is no flexibility for creating centralized management.

Because of the nature of an LLP's inflexibility with respect to centralized management, creating an operating agreement would generally not be very costly. This may be a important point when considering which type of business entity to choose.

PC Overview

As the name suggests, only "professionals" can form a PC. A professional, in this context, refers to someone who engages in a business that requires a professional license, such as a doctor, lawyer, or architect.

In contrast to LLCs and LLPs, PCs offer owners limited liability protection with the exception of malpractice claims. For example, if someone successfully sues a lawyer who is part of a PC for malpractice, then the plaintiff can collect from the defendant lawyer's personal assets.

Moreover, PCs do not have a pass-through taxation scheme and are instead taxed as corporations—in other words, they are subject to double taxation. Until recently, PCs differed from corporations in that PCs had a 35-percent federal tax rate whereas corporations had a graduated tax scheme. In November 2017, Congress passed the Tax Cuts and Jobs Act of 2017 that applied a flat tax rate to all corporate entities.

The needs of your business should determine whether you choose an LLC, an LLP, or a PC. Be sure to consider concerns such as taxes, ease of formation, management flexibility, and liability protection.

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.