What Is the Difference Between an LLC and an LLP?

Originally published by Austin TX Business Law Blog.

One of the major decisions you will take on as you start up your business is what type of business entity to select. There are pros and cons to every type. Understanding your options is the first step in making an educated decision about this important step in the business formation process.

What Is the Difference Between an LLC and an LLP?

An LLC is a limited liability company and an LLP is a limited liability partnership Both are legal business entities. Both provide the benefit of limiting the liability of partners or members involved in the business. Both are not viewed as “businesses” by the IRS for taxation purposes. This means that, while tax documents must be submitted to the IRS for the business, the LLC or LLP itself does not directly pay income taxes. The business earnings pass directly to the partners or members. Each individual partner or member must then report earnings on his or her personal tax forms. This is why both an LLP and LLC is referred to as a “pass through” business entity. Corporate taxes are avoided and “passed through” to personal income taxes instead.

While there are similarities between LLCs and LLPs, there are some key differences. First of all, every state allows for the formation of an LLC. Only around 40 states, Texas included, allow for the formation of an LLP. The majority of LLPs are professional businesses. LLCs include businesses of all kinds. One of the biggest differences between an LLP and an LLC, however, is how the entities are managed.

With an LLC, there are two options for how it can be managed. It may be under member management where the individual members manage the entity directly. It can also be under manager management where the LLC can hire outside management or appoint a member or non-member to manage the business. On the other side of things is an LLP which is run in a way similar to a partnership. Essentially, the business partners carry equal responsibility for the management of the business. Unlike an LLC, an LLP must have a managing partner which is liable for the actions of the partnerships. Partners and investors who do not assume a managerial role receive the benefit of liability protection.

Liability protection is also a big difference between an LLC and an LLP. While both allow for limited liability for all members and partners, these protections are different with each entity. An LLC offers personal liability protection from any debts or lawsuits filed against the business for all individual members. With an LLP, partners are personally liable, but only for their own negligence. This means that one partners is not held responsible for the actions of another partner. Each partner has liability protection form wrongs committed by another partner. Also, the liability will only involve that particular partner’s direct financial investment in the LLP.

Texas Business Formation Attorney

Forming a business is filled with many important decisions. The Kumar Law Firm is here to provide critical legal advice on all of these matters. We are here to help you set up your business for success. Contact us today.

Curated by Texas Bar Today. Follow us on Twitter @texasbartoday.

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