The first steps in starting any type of business involve discovering the product and the target market to launch the product to. Along with that, an important decision that needs to be made is regarding the type of company to be incorporated.
This is where many people feel overwhelmed and confused. And very often, one of the main causes of confusion is a lack of understanding between what LLCs and LLPs are.
By definition, an LLC, which stands for Limited Liability Company, is a separate business entity that combines the limited liability privileges of a registered company and the tax benefits enjoyed by a partnership. It can have one or more members, and is something that small businesses and startups often choose.
An LLP, which stands for limited liability company, is basically a general partnership that combines the benefits of a corporation and a partnership as well. It is registered as a separate business entity. Indeed, it is understandable why people might get confused between the two.
These are the main points of differences.
liability protection
While both LLCs and LLPs provide limited liability protection to their members and partners, respectively, there are few technical differences. The protection is not quite the same in both cases.
For LLCs, members are protected from personal liability for any business debts or claims. Basically, this means that creditors or others to whom the business owes money cannot sue any of the members for their debts. Members are only liable to the extent of their personal investment in the company.
However, for LLPs, the partners are personally liable for their own respective negligence. This means that they will not be responsible for another partner’s mistakes. Or in other words, they have liability protection for mistakes made by other partners. Your risk is only to the extent of your capital investment in the company.
management structure
In terms of management and composition, an LLC can have only one member or more than one member. An LLP, on the other hand, must have at least two partners.
On top of that, an LLC is managed and bound by the operating agreement created by its members. It usually contains the financial composition of the company, along with the respective contributions of its members, profit distribution details, and the like. It also prescribes who can make management decisions in the company.
Members can choose to have all members involved in management or they can assign a single manager to also make decisions for the company.
In the case of LLPs, management is governed by the partnership agreement entered into by the partners. The general rules of any partnership agreement apply here.
Bottom line
For the benefits of limited liability and tax considerations, most small businesses register as LLCs. However, depending on the state of operation, the tax laws may vary unfavorably for LLCs, which must be taken into account. However, for professional groups of at least two people, LLPs may be the best option.
