LLP vs LLC is a common comparison for entrepreneurs trying to decide which business to register. With this in mind, we have put together a detailed guide on how to choose between these two options.
This article is part of our free series on banking for US LLCs, including the steps for opening a business bank account for an LLC, which you can access here.
Feel free to use the table of contents to jump ahead to the sections most relevant to you.
Table of Contents
- LLP vs LLC
- How Is a Limited Liability Partnership Formed?
- How Is a Limited Liability Company (LLC) Formed?
- Should I Choose an LLP or an LLC?
- Frequently Asked Questions
- Ready to Open Accounts With Banks in the USA?
LLP vs LLC
The main difference between an LLP and an LLC is that an LLP is a Limited Liability Partnership with two or more partners while an LLC is a Limited Liability Company, which can be formed with one or more members. Additionally, LLPs are typically formed for professional businesses like legal, accounting, and medical practices while LLCs are typically formed for business and holding purposes.
How Is a Limited Liability Partnership Formed?
How a limited liability partnership (LLP) is formed varies slightly depending on the state. That said, the process is handled by a registered agent, and the company information is submitted to the registrar for approval. Importantly, LLPs are formed in the states where they operate. In fact, the company and partner information is generally made publicly available.
It’s important to understand the US reporting requirements, specifically the difference between EIN vs TIN, for your business structure and what is required when filing taxes with the IRS for your foreign company.
How Is a Limited Liability Company (LLC) Formed?
How a limited liability company (LLC) is formed varies slightly depending on the state. However, in almost all cases, a registered agent will be hired to assist with the process. Alternatively, if you are a local resident of the state, you can usually form an LLC and act as your own registered agent. If you are a non-resident of the state or country, this option is not available to you.
Importantly, if an LLC has operations in a state other than where it is registered, it is required to register as a foreign LLC. However, in most cases, business owners will find that registering a new LLC in the state of operation is easier. Not to mention, more cost-effective.
Should I Choose an LLP or an LLC?
Whether you should choose an LLP or an LLC will ultimately depend on your situation. But also on your specific objectives and what you are trying to optimize for. Most importantly, if you are setting up a business by yourself, you will not be able to form an LLP because an LLP requires at least two members.
Secondly, if you are not forming a professional business (e.g. medicine, law, accounting, etc.) then there are limited benefits to forming an LLP. In most cases, an LLC is a more appropriate option for entrepreneurs and business owners looking to get started with a company for operating or holding purposes.
Alternatively, if you’re looking to register an entity that is ignored for tax purposes and is not liable for taxable income, then you might want to consider a disregarded entity instead. You can learn more about disregarded entities at the link above.
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Frequently Asked Questions
Below are four of the most common questions we receive from people looking to understand LLP vs LLC. If you have further questions you would like to ask our team, don’t hesitate to get in touch.
What Are the Disadvantages of an LLP?
The disadvantages of an LLP over an LLC include pass-through of all profits, the requirement for multiple members, limited tax efficiency options, and (in most cases) public disclosure is required. This means owners do not have a choice between taxing the corporation or themselves. There are limited ways to reduce the tax burden. They cannot form an LLP on their own. And lastly, their personal and financial information is often publicly available.
What Is Better LLP or LLC?
Whether an LLP or LLC is better will ultimately depend on the specific situation. This includes the business objectives, partners, and activities. Additionally, the state of formation and the future plans of the business can also feed into the choice between an LLP and an LLC. With this in mind, it is important to look at all of the formation options before deciding whether an LLP or LLC is better for your needs.
Why Would You Choose an LLP Over an LLC?
You may choose an LLP over an LLC if you have a professional business with multiple partners. On the other hand, if you are a solo entrepreneur or you are starting a business and plan to raise capital in the future, you may want to consider an LLC as it is often a more appropriate business structure.
What Is the Difference Between LLP and LP?
The main difference between an LLP and an LP is that LLPs have limited partners while LPs have both limited partners and general partners. In most cases, general partners have operating control of an entity while limited partners (in the case of an LP) do not. Additionally, general partners may have varying degrees of liability, including up to unlimited liability, while limited partners typically have their liability capped.
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