LLP vs LLC: What’s Best for Your Business?

Cody Cromwell
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When To Form an LLP

Most business owners form their business as either a Limited Liability Company or a Limited Liability Partnership, but when should you do so, and when should you use the other type?

Both the LLP and the LLC are started without a specific number of partners present. However, one of the two permit a withdrawal, while the other does not. That’s why they are considered general purpose partnerships or general partnerships.

The LLC and LLP are both formed by the filing of simple forms with your state, and Minnesota is a primary example. You file with the Secretary of State in your state.

However, there are some major differences between the LLC and the LLP. One of the most important is that you can withdraw from the LLC.

Let’s take a look at the steps to forming both of these businesses.

When To Form an LLC

When To Use an Alternative

LLP vs LLC at a Glance

A Limited Liability Company (LLC) is a popular choice for business owners, especially those operating in states with LLC act requirements … where you are required to file an LLC filing for your business. However, it’s not the ultimate solution for all businesses.

Before you incorporate your business, it’s important to understand the differences between LLC and the standard corporate structure. While the two share some similarities, there are also some crucial differences.

LLC versus Corporate Limited Liability Company:

Both LLCs and corporations allow the owners to protect their personal assets. However, there is a difference between LLCs and corporate-type LLCs (like the LLCs found in most states where the LLC is used as a business entity).

The primary difference is in the liability protection, or how much liability the LLC can shield its owners from. Corporations limit liability in limited ways; for example, the corporation protects the investors from liability associated with the corporation for the opinions and acts of the officers and directors of the corporation, so long as the shareholders agree to the risk.

Liability Protection

Taxes

Vs. Fees

Starting a business is all about securing financing. In the case of for-profit companies, financing comes in the form of loans that you need to pay back with interest. The same holds true for most businesses owned by individuals.

But to secure the best financing and to pay the lowest interest rates, it’s important that you are completely transparent with your finances and have documented and solid financials backing up your financial statements. When the IRS (or the state’s revenue department) is reviewing your taxes, they’re looking for businesses that are profitable enough to pay income tax. If you’re not profitable enough to pay income tax, then you’re probably not turning a profit to justify high interest financing.

It’s also a smart financial strategy to set up a separate LLC or LLP for your business (for tax purposes) so that all of your revenues and expenditures are taxed under that entity. Your personal assets will remain outside that company’s structure, reducing your personal liability if something were to go wrong.

Costs

And tax benefits comparison: BizFile LLC and LLP

Both an LLP and an LLC are flexible entities that enable businesses to structure themselves, but the LLC structure is more popular.

There are costs associated with forming either type of entity. In an LLC, the most basic expense is cost of filing the articles of organization (such as part of the cost of a lawyer), but the cost of an LLC filing will depend on the state in which the business is created, the length of time the LLC will exist, and whether the LLC will have or will not have multiple states (such as foreign) members.

In a LLC, the shares are owned by members, called members. This means that there are no restrictions on the number (or number of shareholders), the number of voting members, or voting percentages. It is far more flexible than an LLP where there are restrictions based on the number of members/shareholders who are required to be original members and along with LLC members must approve the election of additional members (such as through admission of a manager).

LLP is formed by members, whereas, all LLCs must include at least one manager.

LLP tax treatments involve unlimited pass-through taxation and, subject to any dividends or amount distributed to members, a member’s distributive tax subpart F income would pass through to the members with no tax liability.

How To Register an LLP and LLC

Knowing that a Limited Liability Company (LLC) and a Limited Liability Partnership (LLP) are very similar entities can help you decide which entity is best for your business. Actually, there are numerous factors to consider, many of which depend on your operating structure.

The good news is that it is possible to have both an LLC and a LLP. Since it is possible to operate both in a single state, your choice as to which entity is best for your business depends on how you are organized and taxed. Below, we take a look at some of the main differences between an LLC and a LLP, and discuss whether or not one entity or the other is right for your business.

LLP Vs. LLC: The Main Differences

Partnership Taxed as a Partnership:

LLPs are taxed as partnerships in most instances, but you can elect to be taxed as a corporation in certain situations.

LLC Taxed as a Corporation, LLP Taxed as a Partnership:

LLCs are taxed as corporations, as are partnerships.

LLC Taxed as a Partnership, LLP Taxed as a Corporation:

Bottom Line

If you’re thinking about starting a new business or thinking of associating with a new business partner, it’s essential to understand the basics of how your business is set up. Different types of businesses have different forms, and an understanding of those differences can help you make better business decisions and avoid costly mistakes.

In this post, we’re going to take a brief look at some of the most common business forms and how they differ so that you can better understand your business formation choices.

In addition to shedding light on different business forms, this article will also help you determine which business form is right for you. Before we talk about different business forms, know that there are four types of business formations you can choose from:

  • Franchise
  • Corporation
  • Limited Liability Company (LLC)
  • Cooperative

Let’s take a closer look.