Every business entity available was designed to provide advantages to certain types of owners and business models. LLCs and LLPs have similarities that can make it confusing to know which is best to choose. Here are five differences between the two that can help understand each entity better.
Ownership
In an LLC, all owners are called members, and one member, in particular, is named the Registered Agent and serves as an official point of contact for the company. In an LLP, owners are partners, and there is greater flexibility in assigning control and proceeds for each partner. Typically, certain partners are designated as decision-makers in the day-to-day operations, with certain decisions, such as partnership changes, requiring the approval of all partners.
Longevity
An LLC may have to be dissolved if a key owner dies or exits the business. In an LLP, partnerships can survive such a loss and continue operating. This is ideal for businesses, such as law firms, that are often passed on to heirs or successors.
Taxation
LLPs are taxed as a pass-through entity and, unlike an LLC, cannot elect to be taxed as an S Corporation.
Liability Protection
In an LLC, the owner’s liability for business debts is limited to the amount the owners have put into the business and are fully liable for their own negligence, but not necessarily that of other members. Protections for LLPs vary per state, and while partners may not be liable for other partners’ negligence, they may be fully liable for general business obligations.https://www.forbes.com/advisor/business/llp-vs-llc/
Regional Acknowledgement
For the most part, LLCs are recognized throughout the United States. Conversely, the recognition and administration of LLPs vary from state to state. If an LLP, say a dental practice, wanted to open offices across a state line, they might find that their existing business structure is not acknowledged by that state.
A Limited Liability Partnership may be ideal as your business entity if you are in the professional services industry or have at least one partner that contributes to the financial and operational health of the business. States make forming this type of business entity relatively easy and affordable, giving professionals a quick path to building a company with ideal operating flexibility and liability protection.