Which Is Better: an LLC or an LLP?

By Cindy DeRuyter, J.D.

Which Is Better: an LLC or an LLP?

By Cindy DeRuyter, J.D.

When forming a new business, entrepreneurs must decide what type of legal entity they want to create. A limited liability company (LLC) is a popular alternative to establishing a corporation, as it offers owners (called members) personal liability protection for the business' obligations without the legal formalities of corporations. Some states also allow the creation of limited liability partnerships (LLPs). There are some similarities between these two types of business structure, but there are also some key differences. If you are trying to decide between the two options, the best choice depends on a number of factors.

Woman holding paper in hallway

Tax Treatment

Both LLCs and LLPs offer the same default tax treatment for owners. Rather than having to pay taxes on earnings at the business entity level, profits and losses are passed through to the individual members (LLCs) and partners (LLPs).

Note that if your business is an LLC but you are the company's only member, you will be taxed as a sole proprietor and should expect to file self-employment taxes. However, an LLC has the option to file a corporate return as well.

Liability Protection

One major difference between LLCs and LLPs is the extent to which the owners are potentially liable for the company's obligations.

Members of properly structured LLCs are shielded from personal liability for the company's obligations and legal liability. This means that members' personal assets are only at risk to the extent of each member's investment in the company. However, one caveat is that LLC members can be liable for the actions of other members, usually in cases of unethical behavior, which could potentially leave personal assets vulnerable.

In some states, LLP partners enjoy liability protection from the company's debts and legal obligations too, although this is not true in every state. Unlike LLC members, partners in LLPs are protected from liability from other partners' negligence. For example, in an LLP owned by two doctors, each doctor would enjoy liability protection from malpractice claims brought against the other. However, each doctor would still be liable for the partnership's obligations.

Number and Type of Owners

It's worth noting that your choice also depends on how many investors have a stake in your business and who those investors are.

In order to form a partnership, the business must have a minimum of two business partners. If you are the sole owner of your business, you cannot establish an LLP.

Generally, any natural person or another type of business entity can be either an LLC member or a partner in an LLP. However, state laws may limit LLP owners to licensed professionals, such as doctors, attorneys, or accountants.

Following State Laws to Establish and Maintain Your New Business

Whether you choose to establish an LLC, an LLP (if available in your state), or another type of business entity, you are responsible for ensuring you follow all procedural requirements to establish and maintain your business.

Those requirements include making required business filings with the Secretary of State's office or other business registration entity and paying fees. Both LLPs and LLCs should also maintain operating agreements designed to document business owners' rights and responsibilities and to govern day-to-day operations.

When in doubt, consult with a business law attorney licensed to practice in your state.

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.