The first steps in starting any type of business involve figuring out the product and the target market to launch the product to. Along with that, an important decision that needs to be made is regarding the type of company to be incorporated.

This is where a lot of people get overwhelmed and confused. And very often, one of the main causes of confusion is the lack of understanding between what LLC and LLP companies are.

By definition, an LLC, which stands for Limited Liability Company, is a separate business entity that combines the limited liability privileges of a registered business and the tax benefits enjoyed by a partnership. It can have one or more members, and it’s something that small businesses and start-ups often choose.

An LLP, which stands for Limited Liability Partnership, is basically a general partnership that combines the benefits of a corporation and a partnership as well. It is registered as a separate business entity. Indeed, it is understandable why people can get confused between the two.

These are the main points of the differences.

Liability Protection

While both LLCs and LLPs provide limited liability protection to their members and partners, respectively, there are few technical differences. The protection is not entirely the same in both cases.

For LLCs, members are protected from personal liability for any business debt or claim. Basically, this means that creditors or others to whom the business owes money cannot sue any of the members for their debts. Members are only responsible to the extent of their personal investment in the company.

However, for LLPs, the partners are personally liable for their own respective negligence. This means that they will not be responsible for the mistakes of another partner. Or in other words, they have liability protection for mistakes made by other partners. Your risk is only to the extent of your capital investment in the company.

management structure

In terms of management and composition, an LLC can have only one member or more than one member. An LLP, on the other hand, must have at least two partners.

On top of that, an LLC is managed and bound by the operating agreement created by its members. It usually contains the financial composition of the company, along with the respective contributions of its members, details of profit distribution and the like. It also prescribes who can make management decisions in the company.

Members can choose to have all members involved in management or they can assign a single manager to also make decisions for the company.

In the case of LLP, management is governed by the partnership agreement entered into by the partners. The general rules of any partnership agreement apply here.

Bottom line

For limited liability benefits and tax considerations, most small businesses register as LLCs. However, depending on the state of operation, tax laws may vary unfavorably for LLCs, which must be taken into account. However, for professional groups of at least two people, LLPs may be the best option.