LLP vs LLC: Which is best for your business?

An LLP (limited-liability partnership) and an LLC (limited-liability company) are two different things. The LLP protects business assets from the negligence of another partner. Only the assets of one partner are liable if he or she is sued for negligence. LLP vs LLC Common LLP businesses include law, accounting and architecture firms.

How to Form an LLC

If you do not want to be held responsible for the actions of your business partners, you should form an LLP. If an accounting firm has three partners who have equal ownership (33%) and one of them is sued by a client for negligence, the LLP will only hold that partner liable.

 

Tip LLPs can only be found in 40 states. It’s not available for certain professions if it is. California, for example, allows architects, lawyers, accountants and accountants to form an LLP.

 

How to Form an LLC

If you have partners in your business and are not eligible for an LLP (e.g. your state does not allow LLP formations), then you will need to create a multimember (multipartner) LLC. This will protect you from any business lawsuit or bankruptcy.

When to Use an Alternative

You might also wonder if you should create an S corp (S-corp) or a corporation (C-corp). Although technically an entity that isn’t a business, the S corporation can be a tax status that is favorable for small businesses. When you register as an LLC or corporation, you can choose S-corp tax status.

 

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A C-corp formation is quite complicated and will require the assistance of a business lawyer. A C corporation is preferred by many companies because it allows them to raise capital from investors. C-corps are also required by law for companies with more than 100 shareholders or foreign shareholders.

LLP vs LLC: A Glance

LLP LLC
Liability Protection All partners are protected against the negligence or wrongdoings of their partners Partners (members) cannot be held responsible for the negligence or wrongdoing of their partners
Tax Treatment Taxes on self-employment
Profits are passed through
Some states may have additional taxes
Taxes on self-employment
Pass-through is optional
Optional Scorp election
Some states may have additional taxes
Prices Formation fee: $40-$500
Annual filing fee: $40-$500
Additional State Tax: $0-$800
Formation fee: $40-$500
Annual filing fee: $40-$500
Easy Formation Additional paperwork is required to set up and professional licenses must be shown. It is easy to set up and one-member LLCs are possible
Additional Information The Pros and Cons of an LLP Pros & Con of an LLC

Liability Protection

The LLP protects one partner against the negligence, debt, or wrongdoing of another. If a client sues an attorney for negligence they are only liable for their capital investment in the company, and not all partners.

 

Note States have very different laws regarding LLPs. Some states require that all partners share the liability for a bankruptcy filing. Others don’t. For more information, check with the state’s official website for business registration or a local attorney.

 

Keep in mind these situations when the liability shield may be forfeited while you are forming your company.

  • You can be held liable if you defraud vendors, clients, or investors by operating a business.
  • Improper administration of the company: Failure to comply with the legal requirements for an LLC (such as holding annual meetings) can lead to personal liability.
  • Combining personal and business funds: You could be personally liable for any business activity if you keep company money in your personal checking.
  • Using personal funds to pay LLC obligations: Personally paying company bills could expose you to liability
  • Insufficiently capitalizing an LLC at startup:Forming companies without enough resources to meet their initial obligations may cause problems later.

Taxes

The taxes for an LLC and an LLP are very similar. States often allow “pass-through” taxation. You will be subject to a 15.3% tax on self-employment for both. Your personal income tax bracket will receive the income after tax.

An LLC can elect S corporation status, which is the main difference between LLP and LLC in taxation. S-corp status allows a business owner to save taxes because they only have to pay 15.3% of the owner’s salary and not all income. This is known as a dividend. A dividend can save you thousands of dollars each year in taxes.

 

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Prices

The costs of setting up an LLC or LLP in most states are the same. You may need to pay an additional fee for an LLC. California, for example, charges LLPs an $800 flat tax annually.

Depending on the state you live in, the cost of forming an LLC or LLP can vary greatly. Here is a rough estimate of the cost.

  • Initial filing fees:$40-$500 (the fee to create an LLC).
  • Annual filing fees: $40-$500 (the cost to maintain an LLC current when you file yearly filings)
  • LLP annual state tax: $0 up to $800 (the additional tax that an LLP may be subject to)

How to Register an LLP or LLC

Both the steps for registering an LLC or LLP are similar. It is possible to register your LLC or LLP online via the website of your Secretary-of-State, or another official business registration site. These are the steps you need to follow if you want to register an LLC or LLP yourself.

  1. Get an Employer Identification number (EIN).
  2. Draft your partnership agreement if you intend to form a partnership.
  3. Visit the official website of your state for business registration.
  4. Send the articles of organization along with any other information.
  5. Select your registered agent.
  6. Document when your LLC or LLP must be renewed with the state.

Many business owners find it difficult to follow the legal steps on their state’s website for business registration. IncFile is an online legal service that can provide professional help. It will send your LLC and LLP documents directly to the state, free of charge, plus any applicable fees.

Visit IncFile

Bottom line

Both LLPs as well as LLCs are easy-to-use business structures and are great for those who are just starting a business. Both provide personal liability protection for their owners and are easy to set up and maintain. Generally, LLPs work best for certain professions while LLCs work better for all other types of businesses.

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