Should Your Business Be a LLC, LP, or LLP?

If you are starting a business, one of your first decisions will be selecting a legal structure for your new enterprise. There are multiple types of entities to choose from, including a limited partnership (LP), a limited liability partnership (LLP), and a limited liability company (LLC).

There are important differences between these types of entities. Entrepreneurs need to understand the different structures to select the best option for their particular business.

A local business attorney can help you understand the different types of liability protection for these company structures. Contact a business organization attorney for legal advice on getting your business started on the right track.

General and Limited Partnerships

A partnership is basically two or more people who decide to go into business together.

Many states treat partnerships as “general partnerships” by default. This means that each partner is individually and equally liable for any debts incurred by the business. Each partner is also presumed to have an equal say in the management of the business, unless the partners determine otherwise.

A limited partnership, is an entity registered with the state composed of at least one general partner and one limited partner. Only the general partners are responsible for the losses of the business. The limited partners are essentially passive investors: They share in profits, but not the losses or day-to-day operations.

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Limited Liability Partnership

With a limited liability partnership, there is no general partner in the same sense as a limited partnership. In an LLP, all partners are limited, which means none of them is typically considered personally liable for business debts.

But unlike the limited partners in a limited partnership, LLP partners can all share in the management of the business. For this reason, LLP structures are common with professional groups, such as law and accounting firms.

Limited liability generally protects partners or members from personal liability. This means that creditors cannot go after your personal assets for company debts or liabilities. However, there are some requirements to keep your personal and business assets and liabilities separate.

Talk to a business attorney to make sure you don’t expose your home or personal bank accounts to business debts.

Limited Liability Company

A limited liability company (LLC) is often thought of as a hybrid between a general partnership and a corporation. LLCs have members rather than partners, but their individual liability is limited to their interest in the business. And unlike LPs and LLPs, which are multi-person partnerships, one person can form an LLC.

LLCs also do not have as many formal requirements as corporations. LLCs are often an attractive option for startup businesses. However, there are general requirements like filing articles of organization with the Secretary of State and choosing a registered agent.

LLCs are also flexible when it comes to deciding who should manage the business. An LLC should always have an operating agreement that spells out each member’s roles and responsibilities. Some LLCs may appoint a single member to manage the business.

Others may have a group of managers, while other members are simply passive investors, like limited partners in an LP. A qualified business attorney can assist your LLC in drafting an appropriate operating agreement.

Taxation for Your Business Structure

It is also important to consider how your business structure will be taxed. Business tax treatment will depend on state law and your management structure. Talk to a business tax attorney to avoid double taxation and take advantage of tax benefits.

Limited partnerships and limited liability partnerships are separate pass-through entities for federal tax purposes. Single-member LLCs are normally “disregarded” by the IRS and state tax department as pass-through entities.

This means any income or losses incurred by an LLC are “passed through” to the individual members. Members report income and losses on their personal income tax returns. However, multi-member LLCs are partnerships (pass-throughs) by the IRS unless they elect corporate taxation.

Getting Legal Advice in the Business Formation Process

While you can file the paperwork to establish your business entity on your own, it’s a smart move to have a conversation with a business lawyer beforehand. Contact a business organization attorney to assess your business needs.