Learn the Key Differences Between LLC vs. LLP

llc vs llp

Business partners who plan tostarting a businesstogether might consider forming either a有限责任公司(有限责任公司)or alimited liability partnership (LLP).

When it comes to LLC vs LLP there are a few key differences. Although both are granted limited liability protection and don't directly pay income taxes, the differences lie in management requirements, liability protections, liability insurance obligations, and tax benefits. As requirements vary from state to state it is impossible to give a catch all summary of what these differences entail so researching through your local enterprise office is the best way to understand the differences between LLCs vs LLPs.

Because rules vary widely, especially for LLPs, it’s important to research specific rules in your state. Here’s what you need to know about LLCs and LLPs.

LLC vs. LLP Key Differences

  • LLP is not available to single-owners.
  • With LLPs, only individuals can be a partner.
  • LLCs have more options than LLPs when it comes to taxation.
  • In many states, partners in an LLP are shielded from liability if another partner faces a malpractice claim.

What is an LLC?

A limited liability company is a legal management structure that is created to operate a business. Owners of an LLC, who are called members, areafforded personal liability protection, which means that their personal assets cannot be involved in the business’ litigation or debt collection. (Note, however, that this protection is contingent upon the owners keeping their personal and business finances separate.)

Individualsor multiple members can create an LLC, and there is no cap on the total number of LLC members. LLCs have choices when it comes to taxation, based on the number of members they have and the way they operate.

See our state specific guides forCalifornia LLC,Texas LLCandFlorida LLC.

Single-member LLCs can choose from:

Multi-member LLCs can choose from:

  • Partnership
  • S corporation
  • C corporation

What is an LLP?

A limited liability partnership is a business entity type that affords personal liability protection to business partners. LLPs are to general partnerships what LLCs are to sole proprietors—it’s a step up from the default in terms of organizational structure and liability protection. What is unique to LLPs is that partners do not assume liability for any wrongdoings of other partners, employees, or the partnership itself.

While the owners of LLCs are called members, owners of LLPs are called partners. There is no cap on the total number of partners. Typically, the responsibilities of each partner are laid out in a partnership agreement.

Professional businesses—such as law firms, accounting firms, or medical offices—often form as LLPs. State rules frequently restrict LLPs to professions that are licensed, including doctors, dentists, accountants, and lawyers, but state laws vary widely when it comes to LLPs. Be sure to check with state officials, typically in the secretary of state's office, to determine the rules where you operate.

LLC vs. LLP: similarities and differences

LLCs and LLPs have basic similarities, but they’re not synonymous.

Formation and management

  • How they’re similar:Both LLCs and LLPs are legal entities that require paperwork and fees to form, including a legal agreement that spells out the details of the business’ operation—from the responsibilities of the owners to how money will be distributed and decisions made. For an LLC, this document is called the operating agreement. For LLPs, it’s called the partnership agreement.
  • How they’re different:The LLC structure is available to single-owner businessesandmulti-owner业务,但LLP)not available to single-owners. (It’s called a partnership, after all).

Members or partners

  • How they’re similar:There is no cap to the number of members in an LLC or partners in an LLP.
  • How they’re different:In LLPs, only individuals can be a partner. In LLCs, other business entities, including corporations, other LLCs, or trusts can be members.

Taxation

  • How they’re similar:LLPs and LLCs are automatically considered pass-through entities. For the purpose of federal income taxes, any profit and losses “pass through” the business to the owners, and must be reported on the LLC member or LLP partner’s personal income tax returns.
  • How they’re different:LLCs have more options than LLPs when it comes to taxation. LLCs can elect to be taxed as a corporation—usually an S corporation. In an LLCwithoutan S election (like a general partnership), members pay self-employment taxes on their portion of the LLC’s total earnings. As an S corporation, owners can elect to be paid a salary on payroll, and pay Social Security and Medicare taxes only on that salary. The rest of the business’s profits arenot subject to self-employment tax.

Liability protection

  • How they’re similar:LLC members and LLP partners can’t typically be held personally liable for the failings of the business.
  • How they’re different:In many states, partners in an LLP are shielded from liability if another partner faces a malpractice claim. In LLCs, members may be held liable for other members’ malfeasance or wrongdoing. Generally, however, the LLC will insulate a member from personal liability when an employee or other member causes harm without the knowledge or direction from that member.

Final thoughts

If you’re thinking of starting a business with a partner (or many partners), the right legal and management structure can reduce your tax burden and protect your personal finances. Check with the secretary of state where you operate to determine the rules that will apply to you.

Differences between LLC vs. LLP FAQ

What is better LLP or LLC?

It depends on your business needs. A Limited Liability Partnership (LLP) may be a better choice if you are operating a professional services business, such as a law or accounting firm. This type of structure offers personal liability protection to all partners. An LLC may be a better choice if you are operating a traditional business, such as a retail store or restaurant, as it offers more flexibility in taxation and management.

Why would you choose an LLP over an LLC?

An LLP (Limited Liability Partnership) is a business structure that combines elements of both a partnership and a corporation. It allows partners to enjoy limited liability protection while still having the flexibility of a partnership. The key advantage of an LLP over an LLC is that, with an LLP, each partner's personal assets are protected from debts, obligations, and liabilities of the business. This means that if something goes wrong with the business, the personal assets of each partner are protected. Additionally, LLP’s are more attractive to investors due to the increased liability protection. Furthermore, LLP’s are typically simpler to administer than corporations.

What is the downside of an LLP?

The main downside of an LLP is that the members of the LLP have unlimited personal liability for the debts and obligations of the LLP. This means that each member is responsible for the liabilities of the LLP, regardless of their individual contribution. This can leave members exposed to potential personal financial losses and is a major consideration when deciding whether or not to form an LLP. Additionally, LLPs are subject to more stringent regulations than other business structures such as sole proprietorships or corporations, which can increase administrative costs.
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