Difference Between LLC & LLP
Different types of business structures provide the owner with various options when starting a small business. No one type of business is better than another; each structure has its own advantages and disadvantages. Two distinct business structures are limited liability corporations and limited liability partnerships.
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Facts
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Limited liability corporations, called LLCs, are not a federally recognized business structure; rather LLCs are governed by state statutes. The Internal Revenue Service allows an LLC owner to select sole proprietorship, corporate or partnership income tax status.
Limited liability partnerships, or LLPs, are taxed only as partnerships. According to the IRS, a limited liability partnership is composed under a state's limited liability partnership law.
Features
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The IRS allows an LLC owner to select the form of business on Form 8832, Entity Classification Election. An LLC with one owner is allowed to select sole proprietor or corporate income tax status. An LLC with two or more owners is taxed either as a corporation or a partnership. However, an LLP owner is not allowed freedom of choice. The business activity of an LLP is reported on IRS Form 1065, U.S. Return of Partnership Income.
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Advantages
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The freedom to elect an entities' classification make LLCs an attractive option to business owners. An LLC owner can choose to have net profits reported on the the owner's income tax return, or can incorporate and allow net profits to be taxed at corporate income tax rates.
On the other hand, according to the "2009 U.S. Master Tax Guide," LLPs are most likely used to give liability protections from partnership liabilities. Limited liability protection limits a partner's losses in the event of a lawsuit or other claim to the amount invested in the partnership.
Disadvantages
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If the owner chooses to form an LLC as a sole proprietorship, he has no liability protection. In a lawsuit or other claim, the owner's losses are not limited and her assets are unprotected. LLPs provide liability protection; however, the structures are often complex and require an accountant to keep contemporaneous records of the amounts invested by the partner in the business.
Considerations
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According to the IRS, partners are not employees and should not be issued Form W-2s. Therefore, the income someone receives from a partnership is subject to self-employment taxes. Self-employment taxes require a self-employed people to pay both the employee's and employer's portions of Social Security and Medicare taxes. The business owners of an LLP or an LLC organized as a partnership are not employees, and they are required to pay self-employment taxes on income received.
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References
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