What are the Differences Between an LLC and an LLP?
Organizing your business into an LLC or LLP can have significant advantages for you and your company. However, it is important to know the strengths and weaknesses of each before deciding if an LLC or LLP is appropriate. The entity known by the abbreviation LLC is also known as a limited liability company. An LLP is short for the entity knows as a limited liability partnership.
The implications of an LLC or LLP can be summed up into four categories: formation and operations, legal protections, state laws, and tax implications.
Formation and operations:
Both LLCs and LLPs share that they are formed through either an articles of formation or articles of organization. They are also very similar in that they are usually operated based upon an agreement. The first area of difference is in how members buy in, sell out of the organization, or are removed. Allocation of voting shares is also often different between the two organization types. An experienced attorney can more thoroughly explain the differences and how those differences could impact your operations.
The biggest difference between the organization types in found in the legal protections provided. While both personal assets are shielded from business expenses by both LLCs and LLPs only LLPs protect each member from the other’s liability. Therefore in an LLP it is possible to not be jointly liable as you would be if you were a partner in an LLC.
State laws can vary so it is important that you consult with an experienced attorney well-versed in the law of the state you intend to organize in. Some general principles are that LLCs can be formed by person or business. On the other hand, LLPs are sometimes limited to professionally licensed individuals only.
Both LLPs and LLCs permit individuals to avoid “double taxation” by “passing through” business earnings to its members. However, in the case of single member LLCs, the IRS will consider the member “self-employed”. LLPs receive better treatment by the IRS as they are considered to be partnerships. Partnerships allow the only partners to pay taxes on the passed through earnings.
Both LLCs and LLPs can offer significant legal protections and tax advantages. It is important to consult with an experience attorney to ensure that state law is adhered to and the most appropriate organizational structure is selected.
If you are seeking a business formation attorney in New Jersey or Pennsylvania
I invite you to contact the legal team at Maselli Warren, PC. We have been helping business owners in formation and transactional matters for over 15 years. We can help you navigate which entity type is best fitted for your situation and industry.