An LLP is a Limited Liability Partnership and is, simply put, a cross between a corporation and a partnership that allows the partners to enjoy some limited personal liability. Each state has different rules for who can form an LLP. In Florida, you must choose a FL resident as the agent to receive legal notices from the FL Secretary of State; you must have an Employer Identification Number (EIN); you must have at least two partners; and you must file and annual report to maintain status as an LLP. An LLC on the other hand is a business entity that limits the liability of its owners or members. An LLC is commonly favored and more attractive for small businesses. An LLC is commonly favored and more attractive for small businesses.
Both an LLC and an LLP separate personal assets and business assets in the case that a lawsuit arises. For instance, in an LLC, owners only stand to lose the money they have invested in the business. Similarly, in an LLP, if the partnership fails, creditors cannot go after a partner’s personal assets or income. This is often called “limited liability,” hence the name of these types of businesses. Additionally, in terms of forming an LLC or an LLP, both require you to file organizational documents with the FL Division of Corporations and both entities should draw up the relevant agreements that arrange the rights and responsibilities of those individuals involved in its formation and ownership. LLC formation is typically less detailed than those required by LLPs and LLCs have more freedom to operate outside their registered state whereas an LLP may not easily do so as not all states recognize Limited Liability Partnerships.
What are the differences between an LLC and an LLP?
In terms of ownership, taxing, and management, here are some key differences between the two:
Limited Liability Partnership
- Ownership: Requires two people to form
- Taxing: LLPs are taxed the same was as a general partnership where the owner reports their income and expenses on a partnership tax form and has a share of profits or losses from their individual tax return in a process known as “pass-through” taxation.
- Management: Both partners equally share responsibility in managing and decision making for the business as well as have equal power to enter into contracts on behalf of the company and equally share the business’s profits and losses.
Limited Liability Company
- Ownership: Only requires one person to form
- Taxing: LLCs have more options for taxing available. LLCs are taxed as a sole proprietorship or general partnership depending on the number of owners, but also have the option to be taxed like corporations under C-Corporation or S-Corporation status.
- Management: LLCs can be managed by members or a group of managers and can be detailed in defining what they want in terms of management structure, decision making process, and distribution of profits and losses, and contributions and specific responsibilities of its members.
What is the advantage of an LLP over an LLC? What is the disadvantage?
Like most business entities, LLPs and LLCs come with many advantages and disadvantages. Generally, limited liability companies are attractive to small businesses because they are inexpensive, easy to form, and simple to maintain. LLCs tend to be the right choice for business owners who are looking to protect their personal assets while also having the ability to grow their business and gain credibility with consumers. However, large businesses also opt to form an LLC. For example, Amazon, is a large and well-known consumer platform that operates as an LLC. On the other hand, LLPs are generally more attractive to licensed professionals who are looking to form a business that will entail their professional services. This is because many states do not allow licensed professional to open a standard LLC, and as a result many instead resort to an LLP. For example, many veterinarian offices, dental offices, or real estate offices, operate opened as a limited liability partnership. This of course, depends on whether these licensed professionals find this to be the best fit for their business.
In general, some of the advantages of LLPs and LLCs are:
- Two or more partners can run the business as partners
- Partners are protected from negligence of other partners
- Each partner, if desired, can manage the business.
- Partners are allowed to leave the business and new partners can enter (depending on the partnership agreement’s terms)
- Pass-through taxation (just like an LLC)
- Only one member, if preferred
- Offer greater liability protection because LLC owners are protected against liability for business debts (except in cases of fraud, deceit, or other misconduct)
- Any type of business can be formed (however, Florida requires licensed professional to form a PLLC)
- Pass-through taxation, where members are not taxed for the LLC but pay LLC taxes on their personal income tax return
- Flexibility in taxation because LLC’s can opt to file taxes as an S corporation
- Filing requirements are simple
In general, some disadvantages of LLPs and LLCs are:
- Not all states recognize them (Florida does)
- No ability to file taxes as an S Corporation
- Any partner in an LLP can still be held personally liable for their individual business debts.
- Must have a managing partner, but all partners must help run the business
- More exposure to liability
- Filing requirements are lengthier and more complicated
- In Florida, all LLP’s must carry insurance because of the possibility of negligence
- In many states, like Florida, professional cannot form a standard LLC
- Some states require LLCs to file annual reports (Florida is one of these states)
- Can be more costly to operate than an LLP
- Managing member must keep accurate business records and have bank accounts that are separate from their personal accounts; if not, creditors can make them personally liable
In sum, if you are not a licensed professional, an LLC is a good business to form. However, if you are a licensed professional, an LLP may be a better fit for you. Because all states differ, it is best to verify the rules in your state. No matter which business entity you chose to form, both have their advantages and disadvantages as outlined above. The right fit will depend on your needs and wants in forming your business. Regardless of which you chose, you will need to file the proper documents, pay the filing fee, and create your operating agreement (LLC) or partnership agreement (LLP).