LLP vs LLC (What’s the Difference?) - MarketWatch (2024)

Our Guides Legal Services team explains the difference between LLC and LLP so you can make the best decision on what entity type is right for your business. We will also discuss some of the best LLC formation services currently on the market.

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LLP is an acronym for limited liability partnership. It’s a type of limited partnership that can usually only be created by licensed professionals such as attorneys, accountants, or architects. Since this is a partnership, owners of the LLP are called “partners” — unlike owners of an LLC being called members.

LLPs are common amongst licensed professionals because they offer protection against liability arising from negligent business partners as well as business debts.

Pros and Cons of an LLP

LLC is an acronym for limited liability company. It’s a type of business entity that combines the tax benefits of a sole proprietorship with the personal liability protection of a corporation. Since an LLC is its own legal entity, it can take on business debts, own property and have a bank account without attaching any liability to its members.

LLCs are common among small businesses and entrepreneurs because they offer tax benefits and liability protection without the formalities of a big corporation.

Pros and Cons of an LLC

The key difference between LLC and LLP is that an LLP is a partnership and an LLC is not. This leads to many other distinctions between the two business structures as a result.

Taxation

In terms of taxation, LLCs are flexible because they do not have their own tax classification. One way the owner of an LLC may choose to be taxed is as a C-corporation, however this subjects the LLC to double taxation. Double taxation is when the entity pays a corporate tax and the members pay personal income tax. LLCs can also elect S-corporation tax status.

To avoid this, most entrepreneurs will choose the other option — to be taxed based on the number of members in the LLC. For example, single-member LLCs can be taxed like a sole proprietorship and multi-member LLC can be taxed as a partnership.

Both sole proprietorships and partnerships are considered “pass-through entities” for tax purposes. This means they don’t pay corporate taxes. Instead, the tax liability passes through the entity and lands on the individual members. Those individual members must then report their distributions from the company to the IRS on their personal tax returns.

Unlike LLCs, LLPs can’t choose to be taxed as anything other than a partnership. In practice, this doesn’t make much of a difference since it’s usually the preferred tax structure.

Multi-Member Opportunities

One of the appealing aspects of both LLPs and LLCs is their flexibility in terms of ownership, which allows multiple individuals or entities to join together to operate a business. Because of this flexibility, both LLPs and LLCs are popular choices for various types of collaborative business ventures, ranging from family businesses to professional service providers to investment groups. However, this flexibility also means that it is essential to have a clear and comprehensive operating or partnership agreement in place to define the rights, responsibilities, and procedures for each member or partner.

State Regulations

Both LLPs and LLCs are legal entities that are created by filing documents with a state agency, typically the Secretary of State. Because they are state-level entities, they are subject to the laws and regulations of the specific state in which they are registered. This includes maintaining items such as formation documents, annual reports, and submitting fees.

These rules and regulations can vary significantly from state to state, so it is essential for business owners to consult with a legal or tax professional to ensure they are fully compliant with the specific requirements in their jurisdiction.

Formation

LLCs can be formed by anyone that files their articles of organization with the Secretary of State. Each state has slightly different requirements for business formation, however you will usually be required to appoint a registered agent and obtain an EIN from the IRS.

In most states, LLPs can only be formed by licensed professionals. Each state has its own list of licensed professionals that can start an LLP, but it’s usually restricted to attorneys, accountants, architects, doctors, etc.

A key difference in forming an LLC vs. LLP is that you can form a single-member LLC but not a single-partner LLP. This is because LLPs are a type of partnership — so there must be at least two people to form one.

Management Structure

The management structure of an LLC is outlined in the operating agreement where you’ll choose to be a member-managed LLC or a manager-managed LLC. Member-managed LLCs share the decision-making responsibilities among the business owners. In a manager-managed LLC, the members will appoint a third party to run the business. This allows members to have a more passive ownership, since they don’t have to be involved in day-to-day operations.

LLPs dictate their management structure using a partnership agreement. In most states, an LLP must have a managing partner that is ultimately liable for the actions of the partnership. There is no such requirement for LLCs in any state.

Liability Protection

LLCs generally offer more complete protection from personal liability than LLPs do. Members of an LLC are only liable for their contributions to the LLC. That’s because an LLC is a completely separate entity from the members that created it. This means that debtors will only be able to reach the LLC’s assets — not the members’ personal assets.

In some states, LLPs can offer you the same limited liability protection as LLCs. However, other states limit the protection to liability arising from the negligence of your business partners. That’s why LLPs are especially useful for professional businesses like law firms. Keep in mind that partners in an LLP are still liable for their own negligence. So it’s important for partners to have their own malpractice insurance despite the limited liability LLPs offer.

​​Forming an LLC generally involves higher initial expenses due to state filing fees and potential legal assistance. On the other hand, establishing an LLP might involve lower upfront costs. While LLCs offer more flexibility in management structure and profit distribution, LLPs are typically designed for professional service firms like law or accounting practices. Both entities require adherence to specific regulations, but the decision between an LLP and an LLC should be based on factors such as the nature of the business, the level of liability protection required, and long-term operational goals.

As always, the best option will depend on the circ*mstances surrounding your business. However, you can ask yourself these questions to see if an LLP is right for you:

• Does my state allow me to form an LLP?
• Am I starting this business with more than one person?
• Does my state require LLP owners to be in a profession that requires a state license?
• Am I a licensed professional?

If you answered “Yes” to all of these questions, an LLP is likely the best option for your business. However, if you answered “No” to any of these questions — you likely can’t form an LLP. In that case, your best option will probably be to form an LLC.