Business & Finance Small Business

Differences Between Llc And Llp

Limited liability companies are attractive to small-business owners because of their liability-shielding benefits and the ease of formation and ongoing administration. Like business owners in other industries, more professional service firms are choosing the LLC structure. Limited liability partnerships are still attractive, however, as they also offer liability protection, ease of creation and limited administrative reporting requirements.

Limited Liability Company

An LLC is a business structure created under state laws. LLCs offers liability protection similar to a corporation with the flexibility, low administrative oversight, and tax benefits like that of a partnership. Depending on the state in which the LLC is organized, LLCs can one or two or more owners. An LLC with one owner is called a single-member LLC; two or members, a multi-member LLC. Members liability for all business conducted on the LLCs behalf is limited to their investment, assuming no member personally guaranteed any business debt.

Limited Liability Partnership

An LLP is a form of general partnership. It is a business that typically provides professional services. Law firms, accounting firms, architectural firms, and engineering firms are all often organized as LLPs. Although LLPs do not technically have limited partners, one general partner is not responsible for the another partners misconduct unless that partner participated with or directly supervised the negligent partner. To create an LLP, you must file an application for registration with your Secretary of State.

Tax Treatment

Both LLCs and LLPs are not taxed at the business entity level. The partners and the members, respectively, are taxed on their proportionate share of the profit or loss distributions as noted on their personal tax returns. However, an LLC can file an election with the IRS to be taxed as a corporation. If the election is accepted, then an LLC will be taxed as a separate business entity.

More on Liability

LLC members incur no liability for the action of other members. However, the extent of liability protection provided by an LLP depends on the state. In addition to liabilities arising from malpractice errors, omissions, negligence - some states offer liability protection for debts and other obligations. A number of states require that LLPs maintain a minimum level of business insurance.

Administrative Requirements

LLCs are created by filing Articles of Organization. Both LLCs and LLPs require annual renewals with the Secretary of State to remain an ongoing enterprise. An LLC conducts its business with members using an Operating Agreement; an LLP uses a . Neither an LLC nor an LLP require annual member or partner meetings or that meeting minutes be kept. For both structures, however, critical decisions affecting the business should be documented to ensure the corporate veil is not pierced.

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