Deciding between an LLP and LLC can be difficult unless you fully understand the differences between the two entities. There are many similarities between the LLP and LLC, but there are a few key differences you must examine in making your choice. State laws vary, and it is possible that your type of business is restricted to either the LLP or LLC, so knowing the laws of your state is also important. If you have any confusion on this point, speak with an attorney licensed to practice law in your jurisdiction. The Secretary of State’s office may also be able to provide some insight.
Limited liability companies offer several benefits for owners of small businesses. In addition to being easy to form, LLCs do not require much paperwork in your initial filing. A key feature of LLCs is limited liability; the owners (called “members”) will not — in most cases — be personally responsible for the debts of the business. This means your personal assets are protected when your LLC owes money.
LLCs exist in a unique nexus of sole proprietorships, partnerships, and corporations, and take the best advantages of each. The LLC entity is less formal and provides more flexibility than a corporation yet still provides the same liability protection. Additionally, LLCs gain the same tax simplicity afforded to sole proprietorships and partnerships yet have additional legitimacy as a result of being a registered business entity.
A key benefit of limited liability companies is that the owners (or “members”) receive limited liability; that is, they can usually not be held personally liable for the debts of the LLC. In addition, if the LLC is sued, the owners’ personal assets are not subject to collection.
However, there are some instances when — as lawyers say — the veil of limited liability is pierced and the LLC members can be personally liable for the debts of the LLC.
Before you form your new company, educate yourself about the differences between the business entities you could choose. Your choice will have a lasting effect on your business’s finances, legal status, and tax requirements.
For most small, closely held, and family businesses, your choice will come down to an S-Corporation or an LLC. An S-Corp is just a standard corporation that files Form 2553 with the IRS. This election distinguishes S-Corporations from C-Corporations and has an effect on how the corporation is taxed.
Though corporations feature limited liability, the term “Limited Liability Corporation” and “Limited Liability Corp” are actually misnomers; LLC is an abbreviation that stands for Limited Liability Company.