The fundamental distinction between LLCs and LLPs is that in an LLP, the partners are personally accountable for the business’s debts and liabilities, whereas, in an LLC, the members are not.
Key Advantages of LLCs and LLPs
- Liability protection
- Allows Flexible Management Roles for Partners
- Limits Potential Legal Liability
- Flexibility with profits and losses
LLPs tend to be flexible regarding management, and every partner’s liability is limited to the amount of capital they have invested.
State Regulations and Tax Implications
In some states, you may use an LLP because state laws prohibit you from forming an LLC. Typically, this applies to those in the medical, legal, and accounting fields, among others.
- At least two partners are needed to form an LLP
- The partners must usually be licensed in the same or related professions
- Creating an LLP requires registration with the state government
One key difference between LLPs and LLCs is taxation; LLP partners are responsible for their own taxes, whereas an LLC’s business income is taxed.
Why Choose LLP over LLC?
An LLP’s principal advantage over an LLC is the personal liability protection it offers to the partners. Furthermore, LLPs can be more attractive to investors and are typically simpler to administer than corporations, making them ideal for professional services firms.
LLP
- Designed for professionals like lawyers or accountants
- Each partner is only liable for their own actions
- Profits/losses pass through to each partner
LLC
- Offers liability protection for a broader range of businesses
- Profits/losses passed to members
- More management flexibility and tax options
The main reason for electing an LLC is its limited liability protection for individual members’ personal assets from any company debts or lawsuits.