A Limited Liability Partnership is a very interesting type of business structure. Limited Liability Companies already combine the ease of running a partnership with the protection of a corporation, and the IRS originally ruled that LLCs would be taxed as partnerships. So what is the difference between a Limited Liability Partnership and a Limited Liability Company? And which one would be the best structure for your company?
What is a Limited Liability Partnership (LLP)?
We’ll answer the easiest question first. An LLP is very similar to an LLC – both protect the company’s owners from lawsuits and debtors, and both have a pass-through tax structure, meaning anything the company earns passes through it, directly to the owners, without being subject to any corporate income tax. However, a Limited Liability Partnership offers an extra bit of liability protection to each partner. So, just like in a Professional Corporation, the other partners in an LLP will not necessarily be liable for the consequences stemming from another partner’s actions.
Do all states recognize LLPs?
Yes, though the laws recognizing LLPs vary from state to state. The majority of the states have adopted the Revised Uniform Partnership Act, which includes a provision for LLPs stating ‘An obligation of a partnership incurred while the partnership is a limited liability partnership, whether arising in contract, tort, or otherwise, is solely the obligation of the partnership.’ In layman’s terms, that essentially means that the company, and not the individual partners, is responsible for any obligations stemming from contracts or torts. The states that haven’t adopted the RUPA instead opted for their own laws to recognize LLPs, but all follow the same basic pattern.
One of the biggest reasons why many people don’t put additional thought into starting up a business is because they believe that it’s expensive to do so. In actuality, starting a business is far cheaper than these individuals realize. Of course the startup costs are dependent on the type of business you’re planning in terms of equipment and/or inventory. However, the initial paperwork to start your own corporation is quite nominal in comparison.
A C-Corporation is an entity that is taxed separately from those who set it up, such as owners and shareholders. It is regarded as a separate entity that can hold its own credit rating, liabilities and assets. Personal liens and debts cannot influence a C-Corporation’s assets or bank accounts because it is its own entity owned by the shareholders and not the founding individual.
Why You Would Want a C-Corp
Forming a C-Corporation has many advantages that are ideal for businesses. As there are many types to choose from, you should have an idea of what you need to form according to your ultimate goals. The C-Corporations have benefits such as:
- Unlimited growth potential
- Private shareholders and investor accountability
- Limited liability
- Perpetual existence – A C-Corporation has perpetual existence meaning that it will continue to operate even if the owner quits his or her position. The corporation will continue to conduct business as normal and doesn’t require the founding member to be a part of the staff. For example, Steve Jobs left Apple in 1985 although he was a founding member. Without his influence, Apple continued to conduct business.
This week on the ABC’s of MyCorp, we’re focusing on the letter “O” for operating agreement. State laws are fairly lax when it comes to operating agreements – a handful of states require that an operating agreement be drafted, and even fewer require that Limited Liability Companies hold onto written copies of it. So, typically, LLCs choose to either forgo creating an operating agreement, or simply say that their operating agreement was agreed to orally.
However, the lack of government oversight for operating agreements does not make them any less important or valuable. Even if your LLC was created in a state without laws governing operating agreements, it is still a good idea to draft one and keep copies of it on hand for a few important reasons.
For our third installment of the ABC’s for small business, we decided that we liked the letter “C” so much that it had to stay in our word of choice – literally! C-corps are organization structures for businesses that provide non-tax benefits with profits taxed separately from its owners. Beyond just taxing profits separately, c-corps also have the distinction of being separate entities from their owners entirely in both control and management and as such, may go public and raise investment capital, engage in business, and initiate lawsuits.
Last March we did a post on C-Corp 101 and the four considerations to making your business tax efficient, provided below for a quick recap: Continue reading