The first few steps in starting any kind of business involve figuring out the product and the target market to pitch the product to. Along with that, an important decision that needs to be made is regarding the type of company to get incorporated as.
This is where a lot of people get overwhelmed and confused. And most often, one of the main causes of confusion is a lack of understanding between what LLC and LLP companies are.
By definition, an LLC, which stands for Limited Liability Company, is a separate business entity that combines the limited liability privileges of a registered corporate company and the tax benefits enjoyed by a partnership company. It can have one or more members, and it is something that is usually chosen by small businesses and start-ups.
An LLP, which stands for Limited Liability Partnership, is basically a general partnership which combines the benefits of a corporation and a partnership as well. It is registered as a separate business entity. In effect, it is understandable why people might be confused between the two.
Here are the major points of differences.
While both LLCs and LLPs provide limited liability protection to its members and partners, respectively, there a few technical differences. The protection is not entirely equal in both cases.
For LLCs, the members are protected from personal liability for any business debts or claims. This essentially means that the creditors or other individuals to whom the company owes money cannot file a suit against any of the members for their debts. The members are only liable to the extent of their personal investment in the company.
For LLPs, though, the partners are held personally liable for their own respective negligence. This means that they won’t be liable for another partner’s mistakes. Or in other words, they have liability protection from the wrongs committed by other partners. Their risk is only to the extent of their capital investment in the company.
In terms of management and composition, an LLC may have just one member or more than one member. An LLP, on the other hand, must have at least two partners.
Besides that, an LLC is managed and bound by the operating agreement created by its members. It usually contains the financial composition of the company, along with the respective contributions of its members, the profit distribution details, and the like. It also prescribes who can take management decisions in the company.
The members can either choose to have all members involved in the management or can assign a single manager to make decisions for the company as well.
In the case of LLP, the management is governed by the partnership agreement entered into by the partners. The general rules of any partnership agreement apply here.
For the benefits of limited liability and tax considerations, most small businesses register themselves as LLCs. However, based on the state of operation, tax laws may vary unfavorably for LLCs, which should be considered. For professional groups of at least two people, though, LLPs may be the better option.