LLP vs. LLC: What are the key differences?

Are you an entrepreneur, small business owner, or business professional looking to distinguish between LLPs and LLCs?

If so, this comparison piece is for you.

LLPs and LLCs are two extremely common business structures in the US, and while they bear multiple resemblances to each other, there are also important differences between them that need to be taken into consideration when making a decision on which one is right for your business.

Read on for a detailed rundown of how each structure works, key similarities and differences between them, the pros and cons of each, and some parting advice on how to decide which structure is right for your business.

Key Takeaways

• LLPs offer limited liability, flexible management opportunities, pass-through taxation, and relative ease of formation.
• LLCs offer limited liability, flexible taxation options, and only require one member to form.
• LLPs and LLCs differ subtly across a range of domains such as taxations, regulations, structure, and cost.
• Each structure possesses its pros and cons, and these should be considered carefully before deciding which will benefit your company the most.

Limited Liability Partnership (LLP)

A Limited Liability Partnership, or LLP for short, is a type of intermediary business structure between a partnership and a corporation.

Some of the key features of an LLP include: 

• Limited liability for partners: Partners’ personal assets are exempt from seizure for any of the company’s business or legal-related obligations, including if this is due to another partner’s negligence.
• Flexible management opportunities: Owners are legally considered partners, and the extent of each partner’s involvement is based on a partnership agreement.
• Pass-through entities for taxation purposes: LLPs themselves aren’t taxed; however their profits and losses are passed on to the partners, who report them as part of their personal annual tax returns.
• Relative ease of formation: Although standard registration requirements and ongoing obligations still apply, there is minimal administrative burden for the most part when forming an LLP.

Limited Liability Company (LLC)

A Limited Liability Company, or LLC, is another popular business structure that also combines elements of others.

Key features include:

• Limited liability for members: LLCs offer liability protection to members.
• Flexible taxation options: LLCs don’t have their own distinct tax classification, meaning members are able to choose from a variety of different options such as being traced as a C-corp, S-corp, partnership, or sole proprietorship (in the case of a single member LLC).
• Only one member required: As was just hinted at, an LLC technically only requires one member. This provides a great option for entrepreneurs just starting on their business journey and who are looking to gain some valuable credibility.

What’s the difference between an LLP and LLC?

Criteria	LLP	LLC
Liability	Protection from business debts and liabilities	Protection from business debts and liabilities
Taxation	Pass through taxation	Also considered a pass-through entity but with more taxation options
Regulations	LLPs must adhere to state-specific regulations such as formation requirements, legal fees, and annual reports	LLCs must also adhere to state-specific regulations
Structure	Not available for single owners. Managed by partners, although roles may vary	Available to single and multi-owner companies
Cost	Typically less expensive upfront	Typically more expensive due to filing fees and possible legal aid

Advantages & Disadvantages

LLP

LLC

How to choose between an LLP and an LLC

LLPs and LLCs are two very similar company structures; however, there are subtle differences between them that can make a big difference.

For example, LLPs are relatively inexpensive, but can’t be formed by individuals, whereas LLCs may cost more due to more rigorous filing requirements, but can be formed by just one person. 

If you are an entrepreneur or business owner trying to distinguish between the two for your company, these subtle differences may tip the balance of the scales in one direction or the other. 

Ultimately, the choice can only be made by you as the person who knows the business the best.

LLP vs. LLC: Which option is best for you?

That’s all for this comparison piece on LLPs and LLCs. Well done for reaching the end and putting yourself in a better position to make important business decisions in the future. 

If you are a current/prospective business owner, there is no one better placed to make the judgment of which structure will work best for your business. 

If you are looking to start an inexpensive business as a registered professional, an LLP may be just the structure you are after. 

However, if you are a budding entrepreneur looking to gain some valuable credibility and exercise your taxation options, your company may be better suited as an LLC.

FAQs

Related reading:

• How to start an LLC
• Types of business structures in America