The main difference between an LLP and an LLC is that an LLP is a Limited Liability Partnership with two or more partners, while an LLC is a Limited Liability Company, which can be formed with one or more members. Additionally, LLPs are typically formed for professional businesses like legal, accounting, and medical practices, while LLCs are typically formed for business and holding purposes.
Liability and Ownership
Both LLC and LLP businesses allow for limited liability for all members and partners. With an LLC, the individuals are all protected from personal liability for any debts or lawsuits filed against the business. When it comes to an LLP, partners are personally liable, but only in so far as it applies to their own negligence. Liability only involves the partner’s direct financial investment.
Formation and Structure
An LLP is a cross between a corporation and a partnership. How an LLP is formed varies depending on the state, with LLPs being formed in the states where they operate.
LLCs combine the advantages of a corporation, sole proprietorship, and partnership into one entity.
Choosing Between LLP and LLC
How to choose between an LLP and an LLC:
- LLPs are relatively inexpensive, but can’t be formed by individuals.
- LLCs may cost more due to more rigorous filing requirements, but can be formed by just one person.
Registration Process
Steps to register an LLC:
- Choose a name.
- Select an agent.
- File articles of formation.
- Create an operating agreement.
- Obtain an EIN (Employer Identification Number).
- Acquire necessary licenses and permits.
Generating Revenue
To make money:
- Define your goals and understand your market.
- Register your business formally.
- Establish financing and set up accounting systems.
- Market your products effectively.
- Focus on providing quality and value.
Tax Considerations
IRS treats one-member LLCs as sole proprietorships for tax purposes, meaning the LLC itself is not taxed—only the owner reports profits and losses on Schedule C with their 1040. States may charge an LLC formation fee, and even if the company has zero income or profits, a return might still be required by the IRS.
Note on Tax Filing
- An LLP must file a return unless there is no income or expenses.
- An LLC is not required to show income but still may be considered an LLC for tax purposes.
- LLCs with C corporation status can receive refunds if payments exceed liability.
- LLCs as S corporations don’t pay corporate income tax but must file form 1120S.