LLC vs LLP? Choosing between these two business entities is an important decision for your new venture. Let’s take a look at the benefits of each.
Limited Liability Company (LLC)
A limited liability company (LLC), is a legal entity under which you operate a business from. With an LLC, you pick up your ownership share of your business on your personal return. Either at 100% if you’re the only owner or if there are other owners your share. For example, if you have another partner who owns half also, then both of you would pick up your 50% of your income or loss on your personal return. The entity doesn’t pay federal taxes if there is taxable income, but your share of that taxable income gets added to whatever other items of income you would have had on your return anyway For example, if you had a salary of 80k and your business made 10K, the in this example, your income would be 90k.
Don’t set up your business before you talk to an accountant or you could end up paying too much in taxes. Schedule a no-obligation consultation with an expert from 1-800Accountant.
If your only one owner and there is no separate tax return, it’s a few pages more on your personal return. If there is more than one owner, it’s a separate tax return.
The main reason for electing an LLC is for its limited liability protection. This means that if someone sues the company, they can do that but if you lose the lawsuit, your personal assets are protected and cant be seized in judgment. Only the company can be sued but not you personally.
Limited Liability Partnership (LLP)
A limited liability partnership (LLP) is a general partnership formed by two or more owners, it’s to an LLC. It is somewhat similar to a hybrd of a corporation and a partnership, and the partners enjoy some limited personal liability. Professional businesses are commonly organized as an LLP.
There is one significant difference comparing an LLC vs LLP. An LLP must have a managing partner that is liable for the partnership. As long as silent partners and investors don’t fun the business role, they receive liability protection.
About 40 states allow the formation of an LLP, and the laws vary by state. Some states limit what professions can form an LLP, so check your state statutes.
LLC’s and LLP’s are not recognized by IRS, but are required to file an information return.
Industry specific comparison:
An LLC can be used for any type of industry except for those states that require an LLP for a professional company’s like accountants or attorney’s or other professionals where the state requires a professional license.
