LP, LLP or LLC?

The legal implications of different business structures in Washington

If you are starting a business in Washington State, one of your first key 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). But given the similarly in these names, it is not immediately apparent what the differences between the three are—or which one would be the best for your particular business.

General and Limited Partnerships

A partnership is basically two or more people who decide to go into business together. By default, Washington law treats partnerships as “general partnerships.” 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, in contrast, 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 management.

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 are 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 Company

A limited liability company 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, which makes them a more attractive option for startup businesses.

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 Washington business attorney can assist your LLC in drafting an appropriate operating agreement.

How Will Your Business Structure Be Taxed?

It is also important to consider how your business structure will be taxed. Limited partnerships and limited liability partnerships are taxed as separate entities. An LLC, in contrast, is normally “disregarded” by the IRS and the Washington Department of Revenue. This means any income or losses incurred by an LLC is “passed through” to the individual members and reported on their personal income tax returns.

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 startup lawyer beforehand, to assess your situation and set you up for success. 

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