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  • Justin Howe

What is the Difference Between an LLC and an LLP?


When starting a new business, the type of business entity you decide to establish will impact the amount of personal liability, taxes, management, formalities required, among many other factors. There are a wide variety of options, which can make this decision quite overwhelming. Limited liability companies (LLCs) and limited liability partnerships (LLPs) are two business forms that share some characteristics, but also have some important distinctions.


Similarities


1) Liability

LLC's protect members and managers from personal liability for the LLC’s debts and obligations, as well as for any wrongdoing or negligence committed by the other owners or the employees of the LLC. However, it will not protect members from their own negligence or wrongdoing committed in relation to the business. LLP's provide similar protection from personal liability for the partners. Generally, the partners in an LLP are not personally liable for business debts and obligations. Creditors of LLPs cannot reach the personal assets of the partners and are limited to the assets of the business. In addition, partners in an LLP are not personally liable for the mistakes or wrongdoing (negligence, malpractice, or misconduct) of the other partners. However, partners can be personally liable for their own negligence or wrongdoing.


2) Tax Treatment

LLC's and LLP's are not a tax-paying entity. Rather, profits and losses are passed through to the partners according to their percentage shares in the business. The partners pay taxes on their shares at the individual tax rate. By default, under IRS rules, LLC's and LLP's are treated as partnerships and must file a partnership information return. One exception to this is a single-member LLC, which is treated as a sole proprietorship and does not have to file a partnership information return. Both LLCs and LLPs can elect to be taxed as an S or C corporation if they meet certain qualifications.


3) Formalities

Both LLC's and LLP's avoid the extensive record-keeping and operating requirements imposed on corporations. LLC's must file articles of organization providing basic information about the business with the Secretary of State and pay a filing fee. This is the act that creates the LLC in Oregon. Partnerships are created automatically when two or more individuals engage in a business enterprise for profit. However, partnerships that elect to become LLP's must also file a registration form with the Secretary of State to acquire status as an LLP and enjoy limited liability benefits. Both entities may also have to file an annual report with the state.


Differences

1) Business Purpose

In Oregon, the LLP structure is limited to professional partnerships including accountants, architects, attorneys, chiropractors, dentists, landscape architects, naturopaths, nurse practitioners, psychologists, physicians, medical imaging licensees, and real estate appraisers. Other persons who provide to the public types of personal service substantially similar to the other named professions that may be lawfully rendered only as authorized by a license may also create an LLP.

LLCs, on the other hand, can be formed for any lawful purpose, that is, a specific business purpose is not required.


2) Management

LLCs can elect to be member managed, or the members can designate or hire one or more managers, creating a manager-managed LLC. All the members can participate in the management of a member-managed LLC, although they may choose to alter these rights and responsibilities in their operating agreement. Only managers can manage the operations of a manager-managed LLC. If the articles of organization do not specify that the parties have elected a manager-managed structure, the LLC will default to a member-managed LLC.

In an LLP, all the partners can participate in the management of the business, as is the case in a general partnership. Unlike an LLC, there is no option to hire an outside manager.


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