The first steps in starting any type of business involve figuring out 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 you will be joining.
This is where many people feel overwhelmed and confused. And more often than not, one of the main causes of confusion is a lack of understanding between LLC and LLP companies.
By definition, an LLC, which stands for Limited Liability Company, is a separate business entity that combines the limited liability privileges of a registered corporate company and the tax benefits enjoyed by an associated company. It can have one or more members, and it’s 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 can get confused between the two.
These are the main points of difference.
While both LLCs and LLPs provide limited liability protection to their members and partners, respectively, there are some technical differences. Protection is not entirely the same in both cases.
For LLCs, members are protected from personal liability for any business debt or claim. This essentially means that creditors or others to whom the company 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, partners are personally liable for their own respective negligence. This means that they will not be responsible for the mistakes of another partner. Or in other words, they have liability protection for damages committed by other partners. Your risk is only to the extent of your capital investment in the company.
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.
In addition to that, an LLC is managed and subject to the operating agreement created by its members. It usually contains the financial composition of the company, along with the respective contributions of its members, the details of profit distribution 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 make decisions for the company as well.
In the case of LLP, the management is governed by the association contract entered into by the partners. The general rules of any partnership agreement apply here.
For limited liability benefits and tax considerations, most small businesses register as LLCs. However, depending on the state of operation, tax laws can vary unfavorably for LLCs, which should be taken into account. However, for professional groups of at least two people, LLPs may be the best option.