When you are starting a new business, there are thousands of decisions that must be made, including what type of legal entity to use for your company. Many small business owners consider using the limited liability company (LLC) or the limited liability partnership (LLP).
Both a LLC and a LLP combine the beneficial aspects of a partnership and a corporation, but they also have significant differences. It is important to educate yourself on the advantages and disadvantages of each type of business entity because your choice will have long-term consequences.
Limited Liability Company
A LLC provides its owner(s) (called “members”) with limited liability and certain tax benefits. It is most commonly used by small businesses. A LLC can have one or more members, which can be individuals, corporations, foreign entities or even other LLCs.
It should be noted that not every type of business can be a LLC, so it is essential to check the applicable state law. For instance, financial institutions are usually prohibited from being LLCs. Additionally, some states limit certain licensed professionals from forming LLCs. In those instances, the same benefits may be obtained by forming a professional limited liability company (PLLC).
Limited Liability Partnership
A LLP is a partnership that is established by two or more owners (called “partners”). The LLP is most commonly used by professional businesses. The partners are afforded limited personal liability.
The main difference between the LLP and LLC is that the LLP is required to have a managing partner who assumes liability for the actions taken by the partnership. The investors and silent partners who do not take a managerial role have liability protection.
The laws governing LLPs vary from state to state, so you should confer with a local attorney to determine whether your profession can form a LLP.
The above is a short summary of LLCs and LLPs. To learn more, contact us. Obtaining the right advice from the start can significantly increase the likelihood of your business being a success. Contact The Swenson Law Firm for help.