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When going into business for yourself, you will face the decision of whether to be a sole proprietorship, partnership, or corporation. Within these major types of businesses are several subtypes. Two very popular ways of going into business are as a limited liability company (LLC) and a limited liability partnership (LLP). The difference between an LLC and LLP has mostly to do with taxation.
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What is LLP?
A regular partnership, like a proprietorship, doesn’t offer limited protection against liability. However, a LLP offers some protection from liability without the complications and tax consequences of incorporation. The LLP is always taxed as a partnership. One difference between an LLC and LLP is that owners of an LLC are called “owners" or “members," while owners of an LLP are called “partners."
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What is LLC?
An LLC may be an individual’s business (most states now allow this), a partnership, or a type of corporation. Some think of the LLC as something between a partnership and a corporation. Like a corporation, an LLC does not hold a member liable. Like a partnership, it has a less rigid operations structure and allows “pass through taxation." An LLC may be set up to be taxed in a number of different ways: as a sole proprietorship, as an S-corporation, or simply as a corporation. One of these may be more beneficial than taxation as a partnership.
With a corporation, the corporation itself pays taxes, but with an LLC, the profits “pass through" the company and are distributed to the members. Because of this, the LLC avoids the double taxation that can occur when the corporation is taxed on its profits, and the profits are again taxed as income among the owners.
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Limited Liability Explained
Whether it’s an LLP or an LLC, the owners are shielded from liability related to the business operations. That means that if the LLP or LLC does something that triggers a financial liability, the members (LLC) or partners (LLP) are not liable merely because of their status as an owner or partner.
If an LLP or an LLC is in breach of a contract, creating economic damages for some other party, the members and partners are not liable simply by virtue of ownership. In this respect, there is no difference between an LLC and LLP.
This does not mean that a partner or member is never liable for his or her actions in an LLP or LLC. A partner or member can be held liable if his or her actions on behalf of the LLP or LLC result in liability, but the other partners or members are shielded unless their actions are liable.
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What To Choose?
An LLC is usually advantageous because the taxation can be set up in different ways, one of which may be more beneficial than another. An LLP is always taxed as a partnership; therefore, people will generally choose to become an LLC whenever possible. When is becoming an LLC not possible? This is usually only an issue when a business operates in more than one state, and are not allowed to operate as an LLC in one or more of those states. In those cases, they will have to form an LLP.
So in summary, the most important difference between an LLC and LLP is the level of flexibility in how they are taxed, with the LLC granting more flexibility.
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