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What Is The Difference Between LLC And LLP

The term LLC (limited liability company) refers to a type of legal entity in the US, one that is known in the UK simply as a limited company. The term LLP, or limited liability partnership, refers to a tax-paying business structure in the US. Its UK definition is different. In this article we’ll look at the US definitions – it’s important to understand them if you’re a UK company looking to do business in the US. 

LLP vs LLC

The terms LLP and LLC appear to be so similar they may give the impression that they are variations on a theme. In actual fact, they apply to completely different concepts. There is no LLP vs LLC. A company may choose to be both, one or the other, or neither.

The basics of LLCs

The term LLC stands for Limited Liability Company. It is a legal entity in its own right separate from its owners. Owners can withdraw funds from the company. They cannot, however, usually be held personally liable for its liabilities.

When an LLC is created, its owners must choose a tax-paying structure. This can be a sole proprietorship, an LLP (Limited Liability Partnership), S corporation or C corporation. The first three options are known as “pass-through entities” (or flow-through entities). This means that income passes through the business to the owners before tax is applied.

LLC and sole proprietorships

It is possible to set up a single-member LLC. An LLC under sole proprietorship may seem like a contradiction, but it can make a lot of sense to choose to pay tax as a sole proprietor. This shields the owner’s personal assets from any claims made against the business.

LLC and LLPs

An LLP is essentially the same as a sole proprietorship, although the LLP will have two or more owners. Arguably, this makes the argument for the LLC structure even more compelling. In simple terms, the more people are involved with the running of a company, the more chance there is that someone will do something which leads to a claim against the business. Without the protection of the LLC structure, any partner in an LLP could find their personal assets being put at risk through absolutely no fault of their own.

Liability protection

The main advantage of the LLP ownership structure is that it suits owners who don’t want responsibility for the day-to-day running of the company and prefer to be hands-off. However, limited partners also have lower liability protection, whereas the owners of an LLC have their personal assets fully protected if someone brings a claim. The exception is where an owner of an LLC is also a manager. 

How does an LLP differ from a limited liability company?

The first clear point of difference between LLPs and S corporations is that S corporations are automatically considered to be distinct from their owners. This means that owners of S corporations cannot usually be held personally liable for claims against the business.

The second difference is that LLPs only have to file payroll tax reports if they have employees who are not partners. This is because, technically, partners do not receive wages. They receive guaranteed payments. Like wages, however, these are subject to Federal Income Tax and Social Security and Medicare Tax (FICA Tax).

S corporations, however, do have employees and they must be paid a “reasonable wage” even if they are also owners. As a result, S corporations must always file payroll tax reports and their employees must always pay FICA taxes on their wages. They can, however, distribute their profits without FICA tax being paid on them.

This means that the more profitable a company is, the more advantageous it is to operate as an S corporation. However, running a “pure” S corporation can involve a significant (and expensive) administrative burden – creating an LLC and opting to pay taxes as an S Corporation is much simpler.

LLCs and C corporations

If a company wants the freedom to operate outside of S corporation boundaries (limited to 100 shareholders and with only one class of share), then it needs to become a C corporation. Forming and running a “pure” C corporation requires even more administration than running a “pure” S corporation. Running an LLC and opting to be taxed as a C corporation, is, again, much easier.

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