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LLC vs. LLP: What are the Real Differences?

written by: Amy Carson•edited by: Jean Scheid•updated: 1/24/2011

LLCs and LLPs have much in common. The way they differ is in terms of liabilities and the agreement made for the business. Find out which one should you opt for.

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    Limited Liability Company (LLC)

    895440 -global team- A Limited Liability Company, or LLC, is a business entity that can limit liability to the owners, single or otherwise. These liabilities may arise from the activities of the company and are limited to the capital contribution made by the members of the LLC. Members can be individuals or other corporations and partnerships. The interest of the member which is governed by the capital brought in, also limits or governs the distribution of profits to him/her. The member of an LLC can also manage the business depending on the agreement made with the LLC owners and officers. An LLC is also able to appoint a manger or supervisory team to run the day-to-day affairs of the LLC. LLCs have to be registered with the statutory authorities through filing the appropriate Articles of Organization. An LLC must use an operating agreement which will clearly define its business, the rights of its various members and managers. An LLC can be formed by a sole owner.

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    Limited Liability Partnership (LLP)

    In comparing the LLC vs. the LLP, a limited liability partnership is one in which the liability of all or some of its partners is limited. Some countries require that at least one of the members of such a partnership have unlimited liability, though this is not the case in the United States. In an LLP, the partners have a right to manage a business directly, unlike in corporations where a board of directors that is elected by the shareholders has to undertake that responsibility. As the word indicates LLPs can be formed by two or more members and indicates a partnership in business interests. The partners have interests in the company with the scope of each limited to the extent or percentage of investment that he has put in to form that LLP.

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    Commonality between LLC and LLP

    In the case of LLC vs. LLP, the tax liability is passed on to the owners or members or partners and they are personally responsible for any tax to be paid as a result of their receiving any monies from the company in which they have interests. The company or partnership itself will only pay such taxes that are due as a result of their operations either from material purchased or sold. The full liability for income tax is that of the members or partners of the LLC or LLP. In the eyes of the Internal Revenue Service (IRS) both LLCs and LLPs are pass-through entities when it comes to taxation, meaning any taxes on gains is passed through to the members or owners and not taxed at the corporate level.

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    Which Entity Formation Is the Best?

    Deciding on the best entity formation for your business will depend on your personal circumstances and the way you are proposing to run the business. If the total capital to start the company belongs to you as an individual, and you alone are going to be responsible for its operations and all future decisions, it is better to form an LLC. This will limit your liability to the extent of the capital you have invested. However, if you have made any personal guarantees while arranging loans or credit for your business, these guarantees can force you to extend the force of your personal assets to any liabilities that the LLC incurs.

    If there is a need for you to include any other partner for the running of your business, either because you need the finances or alternatively need the partner’s intellectual or other resources, a LLP is the better alternative. The extent of the interests of the partners has to be laid down in the Articles of Association and filed with the requisite authorities. This will govern the risks and liabilities that each partner will be liable for in case of any losses caused by operations or as a result of any legal action against the LLP.

    It is best to take the advice of legal eagles that have made a profession of tendering such advice. Also keep your CPA or financial advisor very much in the picture and then make the decision based on the advice you get. And, of course, use your own judgment.

    Image Credit: http://www.sxc.hu/photo/895440