Limited liability partnerships (LLPs) and limited liability companies (LLCs) are two types of businesses that give some liability protection to their owners. The main difference between them is the number of owners and restrictions on ownership.
What’s the Difference Between LLPs and LLCs?
|Limited Liability Partnership (LLP)||Limited Liability Company (LLC)|
|State Registration Process||Partnership application, two steps in some states||LLC articles of organization|
|Ownership||Two or more, limited to specific professionals in some states||One or more, no restrictions|
|Federal Tax Type||Partnership tax forms||Sole proprietorship (one-member) or partnership|
|Liability Protection||All partners||All members|
State Registration Process
Most business types must register with their state by filing an application form with the state’s business department. You can register an LLP if your business has two or more partners. Some states restrict LLP status to specific groups of professionals working together.
Registering an LLP with a state is a two-step process in some states. In Texas, for example, the business must register with the state as a partnership or a limited partnership, then it must apply for registration as an LLP.
A limited liability company is a business formed by one or more individuals or other types of owners, with few restrictions on ownership. To register an LLC with your state, you must file articles of organization with the state. In addition to registering with your state, you should create an agreement on how the business will be operated. For LLPs, this is a partnership agreement; for LLCs, it’s an operating agreement.
One-owner businesses (called sole proprietorships) don’t have to register with a state, but many register as LLCs to separate their business from their personal activities and to receive liability protections.
Most states require that LLP partners be professionals. California, for example, allows only licensed attorneys, architects, and accountants to become an LLP. Texas, on the other hand, requires only that the LP be engaged in “any lawful business activity.”
LLC owners (called “members”) can be individuals, corporations, other LLCs, or foreign entities. Each state has different requirements for who can form an LLC in that state.
Federal Income Taxes
The IRS considers LLPs and LLCs to be pass-through business types, meaning that profits or losses are passed on to the owners on their personal tax returns. In both cases, the business net income is calculated for the year and divided between owners based on their agreements.
LLCs and LLPs differ in the forms used to report business income for the year. LLPs and multiple-member LLCs report income on an information return (IRS Form 1065). A single-member LLC reports income on Schedule C of their tax return. LLP partners and multiple-owner LLC members report their shares of business income for the year on individual Schedule K-1s attached to their tax returns.
An LLC may elect to be taxed as a corporation or S corporation, but this change in tax status doesn’t affect the management structure, operations, and liability protection of the business.
Probably the most important reason people choose an LLP or LLC is that it gives business owners limited liability, separating their personal liability from liability for the actions of other owners. Liability for an individual business owner (sole proprietor) or a partner in a partnership is unlimited, and each owner is 100% personally liable for actions of the business.
However, if you create and operate your LLP or LLC by the rules of your state, you can have some protection from liability for debts and lawsuits against the business.
LLPs give limited liability to every owner, even general partners who participate in day-to-day management. In a similar way, the LLC structure protects all LLC members.
Some states may have a lower level of protection for LLP partners—only protecting against the misconduct of other partners, not including contracts entered into by others.
Which Is Right for Your Business?
An LLP might be right for you if you are two or more professionals who want to go into business together and you want to make sure you all have liability protection.
There are several alternatives to an LLP for partnerships that want liability protection but don’t meet the requirements for an LLP. One alternative is a limited partnership (LP) that has at least one general partner responsible for managing the company and who has personal liability for the partnership's debts, as well as one or more limited partners who have limited personal liability. The other is a limited liability limited partnership (LLLP), commonly used for real estate professionals.
LLC might be right for you if you want to go into business by yourself but you want a formal business structure that keeps your business separate from your personal activities, and gives you protection against liability for debts and your actions as an owner. It’s also great for small businesses just starting out that don’t plan on seeking investors or going public.
The Bottom Line
Deciding on a business type is a complicated process, and every business is unique. Get help from a licensed attorney in your state to explore the two types of businesses and how they fit with your situation. They can research the types of professions allowed to form LLPs, discuss the specifics of liability in your state, and help you prepare the documents you need.
Frequently Asked Questions (FAQs)
What is the major advantage of an LLP?
Being in a partnership doesn’t protect you from liability for your actions and those of your partners. LLPs have an advantage over the general partnership, because they protect professionals from liability from the actions of other professionals in the business.
How do you create an LLC?
To form an LLC, you will need to file a registration document, usually called “articles of organization,” with your state’s business department and pay a filing fee. You will need to give basic information such as the name and address of the business and your business purpose. You may also have to list the initial members. Most states have an online filing process.
How do you dissolve an LLC?
To end an LLC, notify the state where you registered your LLC. You may have to file articles of dissolution in some states. You will also need to pay any unpaid fees, including a filing fee for the dissolution document.
Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning!
Texas Secretary of State. “Formation of Texas Entities FAQ.”
U.S. Small Business Administration. “Sole Proprietorship.”
State of California Franchise Tax Board. “Limited Liability Partnership.”
Texas Secretary of State. “Form 701—General Information (Registration of a Limited Liability Partnership),” Page 2.
IRS. “Limited Liability Company (LLC).”
U.S. Small Business Administration. “Business Structures - Partnerships.”
National Agricultural Law Center. “Limited Liability Partnerships,” Page 1.
Legal Information Institute. “Limited Partnership.”
U.S. Chamber of Commerce. “What Is a General Partnership?”
Florida Department of State, Division of Corporations. “Instructions To Form a Florida Limited Liability Company.”
Florida Department of State. “E-File Articles of Dissolution.”