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.
Corporate stock is a measurement of the ownership of a corporation. If a corporation has 1,000 shares of stock and you own 400 shares, you can say that you own 40% of the corporation. Whether the stock is traded privately or publicly on the stock exchange is irrelevant; shares are simply a way of determining an individual’s share of ownership in a corporation.
An LLC is different, however. LLC owners are not referred to as shareholders, but as members. A member’s share of ownership in the LLC is determined by the LLC’s operating agreement or by some other document that outlines each member’s ownership interest. The LLC ownership structure is different from a corporation in this way. Though some LLCs may issue ownership certificates to its members so that each person knows how much of the LLC they own, these are not true stock certificates. Only corporate shareholders own stock.
Because of the ownership structure of LLCs, there is no such thing as a publicly traded LLC. A limited liability company will not appear on the NASDAQ and may not issue stock like a corporation does.
There are two types of corporations: C Corporations (or C Corps) and S Corporations (or S Corps). Both entities are identical in most ways and the variations occur largely in taxation; S Corps are pass-through tax entities — like LLCs — while C Corps pay a separate corporate tax. All corporations are C Corps unless Form 2553 was filed with the IRS to specifically elect S Corp taxation.
Though not all states require an operating agreement and none require you to file it, this document may be the most important one for your limited liability company. The operating agreement governs the relationships among each of the LLC’s members. Even in a partnership between good friends, an LLC should have a detailed operating agreement in the event of unforeseen disputes.