Providing Solutions

What is the difference between an LLC and an LLP?

On Behalf of | Aug 25, 2020 | Business Law And Litigation |

If you are setting up a business in Texas, you will need to choose a business structure for your company. Most notably, the business structure you choose will have implications for individual liability and taxation. Here are some key differences between the limited liability company (LLC) structure and the limited liability partnership (LLP) structure.

Management. An LLC can operate with just one person (or more), wheras an LLP requires at least two partners. LLC members do not have to be just individuals, but can be other LLCs, business or corporations. An LLC is governed by an operating agreement, whereas an LLP would be governed by a partnership agreement. Both an operating agreement and a partnership agreement would clarify the financial and decision-making powers of members or partners.

Taxation. Both LLPs and LLCs can take advantage of “pass-through” taxation, meaning the partners or members account for business profits and losses on their own tax returns only. LLCs, however, also allow businesses to operate as a corporation if desired. In this case, the business income would be taxed  both at the corporate level and then also on individual returns.

Liability. LLCs provide more liability to their members than LLPs, as LLPs must designate at least one partner that bears official liability for the partnerhip. Members of LLCs, conversely, do not bear personal responsibility for the actions and finances of the LLC.

There are additional differences between LLCs and LLPs that an attorney can discuss with you. An LLC is not bound by a lot of government red tape, for example, and shareholder meetings are not required.

When setting up the business structure, the entrepreneur and any other members have to determine what level of legal protection and tax implications they are interested in achieving. There are other considerations to take into account, too, like personal matters such as a potential divorce.

When choosing the business formation that will work best for you, it is a good idea to speak with a legal professional who practices business law.