LLC vs LLP – What’s the Difference?

LLC vs LLP – What’s the Difference?

LLC vs LLP — what are the main differences between these two management structures? Many entrepreneurs are already familiar with limited liability companies, or LLCs. What some don’t know is that there is another kind of business entity called a limited liability partnership, or LLP, available to those with multiple members or co-owners that require protection. Let’s break it down now and see which is right for you.

Liability Protection

As the acronyms suggest, both LLCs and LLPs limit the personal liability of a given business owner. In this manner, they operate in essentially the same way. Both entities separate personal and business assets in the case of a lawsuit. Of course, LLC members and LLP partners will still be personally responsible for any mistakes or damages that result from their own actions.

Ownership Limitations

As you might have already guessed, an LLP is a type of partnership and must have more than one “partner” to qualify, whereas an LLC requires just one person. There is, however, no cap on the number of owners that either entity can have. Further limitations depend on your chosen profession and the state(s) you choose to operate in.

Taxes

LLPs are taxed like general partnerships. The owners report their income and expenses on a partnership tax form as well as a share of the profits or losses from their individual tax return in a process known as “pass-through” taxation. LLCs, on the other hand, have a few more options available to them. By default, they are taxed as sole proprietorships or general partnerships depending on the number of owners. Unlike LLPs, though, they have the option to be taxed like corporations under C-Corporation or S-Corporation status.

Management

In an LLP, both partners equally share responsibility when it comes to managing and making decisions for the business. Both partners have equal power to enter into contracts on behalf of their company. They also share equally with their business’s profits and losses. This is a good set up for partnerships with independent owners.

By contrast, an LLC can be managed by members or by a group of managers. An LLC can define in detail what they want in terms of a management structure, decision making processes, the distribution of profits and losses, as well as the contributions and specific responsibilities of its members. This flexibility in management makes LLCs very attractive to small business owners.

Formation

Both LLCs and LLPs will require you to file organizational documents with the Florida Division of Corporations. Many of the necessary forms are available on their website. Both entities will also want to draw up the relevant agreements that codify the rights and responsibilities of those involved. For an LLC this will be an operating agreement while an LLP will use a partnership agreement. LLC formation typically requires less detailed documentation than those required by LLPs. LLCs also have more freedom to operate outside of their registered state assuming that they register as a foreign business. If an LLP wishes to do the same they will have to jump through a few more hoops to get there.

For more, read our articles on LLC and LLP formation.

Looking to start a business or grow your current business? Contact FL Patel Law today by visiting our website or calling (727) 279-5037.