LLP vs. LLC: Key Differences Between the Two

Vault’s Viewpoint

• Considering LLP vs. LLC structures? We recommend seeking support from a tax professional to determine which option best suits your needs.
• Not all states allow certain licensed professionals to form LLCs, so if you find that you fall into a state-excluded filing category, an LLP may be your better option.
• When you’re considering your options, know that LLPs can only be taxed as a partnership.

The differences between an LLP vs. LLC structure can’t be ignored—and may or may not vary by state of residence. Before we explore the critical areas of differentiation between the two organizational structures, we have to define each option and explore excluded categories. Once we do this, you can determine which structure may offer the most benefit for your specific needs.

What Is an LLC?

An LLC, or limited liabilities company, is a business structure known for its legal protection and flexibility. It is a type of formation that is recognized across all 50 states in the U.S. It only requires a single member to start an LLC.

Similar to an LLP, LLCs protect personal assets from penalties associated with company debt or missteps. This type of formation also provides a degree of privacy, as the owners’ personal information is typically obscured. Also similar to LLPs, this type of formation may be subject to state-specific laws and exclusions that limit the type of professions that can form under this designation.

What Is an LLP?

A limited liabilities partnership (LLP) is a business structure type that serves licensed professionals and partnerships, including those who cannot form LLCs in their respective states. It’s flexible and ensures that all partners associated with the brand maintain limited personal liability for any claims or debts that the business may run into. Additionally, many consider them to be easier to set up than LLCs.

LLP vs. LLC: Which Do I Choose?

There is no universally correct answer to this question, and your answer will depend on your business’s specific location and circumstances.

That’s why whether you’re considering launching an LLP or an LLC, we recommend reviewing your state’s laws surrounding business organization and formation. We also recommend consulting with a business tax professional, as not all states legally recognize LLP formation, and not all states will allow members of certain professions to operate or form under an LLC. An LLC service can also assist by providing important information.

Exploring Tax Differences Between LLPs vs. LLCs

One of the primary areas of difference between LLPs and LLCs is shown during tax season. Major differences dictate how each entity is taxed, and these differences can be made more complicated by state-specific mandates that change periodically.

Generally speaking, LLPs are known as “pass-through” formations that allow any sort of profit or loss to be shown on partners’ personal tax returns rather than the company’s tax profile. However, there are a few exceptions to this that occur on a per-state basis—so if you’re considering forming an LLP, we recommend reaching out to a local tax expert to determine if you’d be bound by any state-specific restrictions. LLPs are also relegated to partnership taxation only. They may also be subject to state franchise taxation in certain areas.

LLCs are more flexible during tax season and can be taxed as a C- or S-Corp, a partnership or a sole proprietorship. Many may choose to file as a partnership through their LLC to avoid the dreaded “double taxation” phenomena in which they will pay corporate earning tax and personal income tax.

LLP vs. LLC: How Does Each Manage?

LLCs are permitted to either manage the business themselves through member management options or outsource the responsibilities via appointments. In this instance, members or non-members may contribute to business management. If an LLC opts to manage this way, it’s called “manager management.”

Conversely, LLPs typically split management tasks between partners. This occurs in alignment with whatever partnership agreement members signed on to be a part of the LLP when they joined or at its formation.

LLP vs. LLC Formation Tips: Making the Most Out of Your Organizational Structure

No matter how you decide to form, there are a few tips to help you save time and resources as you go. We’ve included them below for your reference.

• Don’t be afraid to ask for help. Your formation is one of the most important steps you’ll take to establish your business’s existence. It’s an incredibly technical, state-specific process, and many benefit by seeking support throughout the filing process. We recommend reaching out to an attorney or a state-specific tax professional with any questions you might have before, during or after the filing process.
• Check for fees ahead of time. Skipped fees beget more fees. Be sure to look into any required fees for LLC or LLP establishment ahead of time.
• Create a recordkeeping system. Forming an LLC or an LLP generates paperwork. Be sure to establish a recordkeeping system early on, as it will be easier to stick to as the business grows. Not sure what to save? We recommend starting by saving any communication records between your business and creditors or state associates. We also recommend saving receipts and all forms of confirmation related to your business.
• Don’t be discouraged by delays. The states are all under different loads at any given time. As a result, your application review process may be delayed. Rather than panic, we recommend reaching out to your state’s evaluation department and determining the status of your LLC vs. LLP filing.
• Don’t forget to double-check your entries. While this step may seem obvious, inconsistencies and inaccuracies can slip through the cracks of even the most reviewed application, They can ultimately lead to the delay of your launch. Be sure to review your entry prior to submission.