When you establish your company, you will find that you can set it up in one of various ways. If you and one or more people wish to serve as owners, you may wonder which is better – LLP vs LLC? The following information will give your further details about these business entities.
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LLP vs LLC: The Differences
To understand about the benefits and drawbacks about certain entities, you need to define them. If you are trying to figure out the differences of an LLP vs LLC, you need to review the definition of each entity.
What Is an LLP?
According to the site, Investopedia, a limited liability partnership or LLP, allows for two or more people to partner or work together to make money in a business. This partnership structure limits each partner’s liabilities to the amount each person contributes to the business.
Establishing an LLP allows for partners to spread the risk of ownership and leverage the skills of each partner, thereby creating a division of labor. LLPs are often established by lawyers, fund managers, or accountants.
What Is an LLC?
A limited liability company is designed for companies that may begin as sole proprietorships but wish to enjoy the tax advantages of a sole proprietorship and personal liability protection of an LLC. Basically, an LLC combines the advantages of a corporation, sole proprietorship, and partnership into one entity.
To learn more about the benefits and drawbacks of LLPs and LLCs, contact me or my legal team at any time. Book a call to speak to us here: http://mollaeilaw.com.
LLP vs LLC: Which Is Better for You?
When reviewing the pros and cons of an LLP vs LLC, we need to break down the benefits and how they are covered by an LLP or LLC. These benefits include liability protection, taxation, and management structure.
LLP vs LLC: Liability Coverage
Both an LLC and LLP offer protection against personal liability. However, when you review the liability coverage of an LLP vs LLC, you will note some differences.
In each case, an LLP or an LLC will reduces each partner’s or member’s personal liability to what they contribute to the business. However, in most instances, an LLC provides more in the way of liability protection.
Unless an LLC business is mismanaged, each LLC member will not be held personally liable if an LLC is sued or owes a business debt. As an LLC member, a person is protected against relinquishing personal assets in a business lawsuit, such as a bank account, house, or car.
The amount of liability protection you receive as an LLP depends on the state where you establish your business. For example, in some states, the protection may only extend to being protected against another partner’s business negligence.
You may still be held liable for the business’s overall debts and obligations.
Mollaei Legal Tip: Some states require that at least one partner in an LLP possess unlimited personal liability while the other partners in the LLP remain protected. Therefore, you need to make sure, if this rule applies, that this type of mandate will work out for your business.
You should review your state’s guidelines for LLPs carefully before choosing between an LLP and LLC. I can help you decide on the best business entity for you. Contact me for a consultation anytime. Email firstname.lastname@example.org.
LLP vs LLC: Taxation
When you make tax comparison, an LLP vs LLC set-up can vary.
For example, an LLC may choose to be taxed as a partnership, sole proprietorship, or corporation.
An LLP legally must file as a partnership for income tax purposes.
If you file your taxes as a sole proprietor or partnership, the taxes pass through the business entity to the owner’s individual income tax return.
Generally, if you file as a corporation, you will file taxes on your business tax return, and, again, on your individual income tax return. Therefore, in this case, you are subject to double taxation.
Both LLCs and LLPs may also take a 20% pass-through tax deduction. In other words, an LLC or LLP can subtract 20% of their business’s profits from their individual tax return. However, that does not mean you can automatically enjoy this benefit, as you still need to check for any restrictions.
To learn more about taxation for an LLP or LLC, you should contact a competent tax advisor or accountant. You will also need my legal guidance to see how you can benefit, tax-wise, as either an LLC or LLP.
You can contact me any time. Email email@example.com today.
LLP vs LLC: Management Structure
With respect to the management structure for an LLP vs LLC, an LLC only needs one member to become established while an LLP must have at least 2 partners.
An operating agreement is drafted and created to manage an LLC, and to address any disputes that may arise among members.
An LLC’s operating agreement outlines each member’s financial contributions, how the profits will be allocated, and who is responsible for making decisions for the company.
LLCs may be member-managed or manager-managed. If they are member-managed, each LLC owner has a say in the business operations.
If an LLC is manager-managed, the LLC may be made up of passive LLC members – investor owners who do not have a say in the company decision-making process.
When an LLP is created, the management of the organization is dependent on what the partnership agreement says. Like an LLC’s operating agreement, a partnership agreement details the role and responsibilities of each partner and the profit distributions for and financial contributions of the partners.
An LLP can include a silent partner – someone who is not involved in the decision-making process, but, rather, focuses primarily on investing in the partnership.
Therefore, he or she may share in the proceeds generated by the firm, but may not be an active member of management.
LLP vs LLC: Choosing the Best Entity for You
You need to weigh the benefits and drawbacks of an LLP vs LLC, as it can be quite expensive to change an entity after you have established it. Basically, if you want to concentrate on limiting liability and adding tax flexibility, an LLC, in most cases, is the best choice.
Also, if you plan to run a business yourself, without partners, the logical choice is an LLC.
Some state laws will only allow professional businesses, such as law offices or accounting firms, to establish themselves as LLPs while other states may not allow professionals to set up an LLC. Therefore, you will need to consult with an attorney.
You can reach me for a consultation any time. Email firstname.lastname@example.org today.
What To Do Next
Learning the differences of an LLP vs LLC will give you a better idea about how to proceed with your business plans. I can also help with launching your business and establishing an entity. Email email@example.com to get started now.
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