LLC or LLP: Which is Right for your Business?

Many people who start their own businesses have the ambition and passion required to sell their product or service in a successful manner. However, many entrepreneurs may initially be nearly clueless when it comes to choosing the right business structure for your company. An experienced California business attorney can always help you weigh the pros and cons of different business entities and choose the right one for your needs.

Two common business structures for businesses are the limited liability company (LLC) and the limited liability partnership (LLP). Both of these entities work to provide at least some protection for owners from liability arising out of business matters without the complicated requirements of forming a full corporation. However, there are marked differences between the two entities that make one more fitting than the other for certain business. The following are different pros and cons of an LLC vs. an LLP regarding certain business aspects. For more info about the benefits of LLCs specifically, visit this post.

Formation

Both an LLC and LLP must be registered with the Office of the California Secretary of State. Each entity has its own initial and ongoing filing requirements to remain as an active business entity. For example, registration for an LLC includes articles of organization, which states the name and address of your business, how the business will be managed, the business’s purpose, and must identify a registered agent, which is a party that may be served with court papers in the event the LLC was sued. For an LLP, you must submit a specific application to the Secretary of State with the appropriate filing fees.

Owners and Management

An LLP requires at least two or more partners, while an LLC may be formed by one individual owner. Therefore, if you do not have (or want) any business partners, an LLC will likely be the entity for you. If the business does have two or more partners, questions may arise regarding management rights among those partners. An LLP is managed much like general partnership, which means each business owner has an equal ability to make decisions on how to run the company. If you form an LLC, you will have a choice between operating like a general partnership or more like a corporation by electing officials to handle the daily operations of the business. Though you are not required to establish and file a formal operating agreement for your LLC, it may be highly advisable to do so to avoid or resolve future conflicts.

Liability Issues

LLCs and LLPs differ in the way they protect business owners from personal liability. For example, an LLP protects a partner’s personal assets from liability for actions of other partners or employees that were beyond their control. However, partners of an LLP will be held personally liable for the obligations and debts of the partnership as a whole. Therefore, their personal assets may be at risk if the business fails. An LLC, on the other hand, protects an owner’s personal assets from being seized for debts, lawsuits, or other obligations of the company. The only exception is that an owner may be held personally liable for lawsuits arising out of unethical or unlawful behavior.

Taxation Issues

The federal government uses “pass-through taxation” for both LLPs and LLCs. This means that all partners share company profits and report those profits on their individual tax returns, and the actual company does not also have to pay taxes on the profits. Additionally, an LLC has the option to choose to be taxed instead as a corporation if that would be more profitable for business owners. See here for more information about LLC taxes.

Restrictions in California

If you are looking to choose a business entity within the state of California, state law restrictions may help make your decision between an LLC and LLP relatively simple. California is one of a few states that limits LLP formation to people who hold professional licenses in the fields of accounting, law, architecture, or engineering. If you are not engaged in one of those businesses, you do not have the option to file as an LLP in this state. On the other hand, California prohibits LLC formation for any business that performs a service for which you must hold a state license, otherwise known as “professional services.” Therefore, the type of business you want to start in California may easily help dictate which business entity you may choose.

No matter what type of business you wish to start, it is always wise to consult with an attorney who is familiar with state and federal business laws to ensure you are in full compliance with the law and that you choose the business entity that will most help your company thrive.

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