LLC and LLP: What is the Difference?
A Limited Liability Partnership (LLP) and a Limited Liability Company (LLC) are both fairly new legal entities in the business world. They share similar aspects of a partnership and corporation. However, the differences between these two types of business are particular primarily to the state in which the company operates.
State Laws, Formation and Operation
Laws vary by state, but generally speaking LLCs can be formed by any business or persons, while LLPs are restricted to professionally licensed individuals. Both are created through articles of organization or formation, and are run based on an operating agreement. Differences include:
- The method that partners or members buy in, sell out and add or remove members or partners
- Percentage of voting share or control given to each member or partner
- Distinct tax advantages regarding personal asset protection
Legal Protection and Tax Implications
LLCs and LLPs both provide asset protection from business debts and liabilities. However, in an LLC the members are not protected from the responsibility of another member, but an LLP does provide this protection (source 2290tax). In addition, both types of businesses can pass earnings through from the company entity to the partners or members to avoid filing corporate taxes on earnings and paying personal income taxes on the same profits. This technique, known as double taxation, is the principle difference in how an LLC operates.