Starting a business gives you more independence and financial awards. Every year, around 4 million new businesses are launched. One of the trickiest things these business owners have to do is decide whether to register their new venture as an LLC or an LLP. Let’s take a look at the difference between LLC and LLP and see which is better for your business.
What is an LLC?
An LLC is also known as a limited liability company. There is no limit on the number of owners in an LLC, which makes it a flexible choice for business owners. It’s very easy to set up an LLC and all US states permit them. Some states have a much more straightforward LLC formation process, including Delaware, Nevada, and Wyoming. Delaware, in particular, has streamlined the LLC filing process in recent years. But there are rarely any problems in setting up an LLC in other states, such as Texas. One of the most important things to remember is that a registered agent for LLC in Texas is needed. This can be you, a family member or friend, or a registered agent service. If you choose a registered agent service, expect to pay between $100 and $300 per year for them. This is money well spent if you don’t want your address to become a public record.
What is an LLP?
An LLP is a limited liability partnership. A minimum of two people are required to form an LLP and there’s no restriction on the maximum number of partners. Some states have strict rules regarding the setup of an LLP. For example, in New York only credited professionals can form an LLP. If you are eligible to become an LLP, the process is simple. Just like with an LLC, make sure you assign a registered agent to your business. You also must file for a certificate of limited liability partnership.
The pros & cons of an LLC
The biggest advantage of an LLC is that business and personal assets are kept separate. If an LLC business gets into financial difficulties and creditors are owed money, they cannot try to claim the money back from the individual’s personal assets. This means their house, car, and similar possessions are safe.
Another advantage of forming an LLC is the tax advantages that are associated with them. There’s a lot of flexibility with LLCs and taxes and you can choose whether your business will be taxed as a corporation or a pass-through entity. As an LLC you also qualify for the following tax benefits:
- Deductible business expenses
- Qualified Business Income (QBI) deduction of up to 20%
- If you choose for your LLC to be taxed as a single entity, you won’t be double taxed. This is because corporations have to pay tax on their income and owners have to pay their tax on dividends.
One negative of an LLC is that it’s not always a viable option for people running their business on their own. It often makes more financial sense to remain as a sole proprietorship, otherwise, you’ll have to pay for things such as annual reporting fees. Take time to review any economic development projects in your area in case you can quality for grants or subvention.
The pros & cons of an LLP
A big benefit of setting up an LLP is that all partners that are part of an LLP are protected from the other partners’ liabilities. If one partner makes a mistake, the other partners’ personal assets are safe. An LLP also has tax benefits. The taxes of an LLP are done as a pass-through entity. There’s no risk of double taxation with an LLP as tax is paid when each partner submits income tax forms.
A downside of an LLP is that there must be two members to keep the LLP active. This is only a problem if the LLP consists of just two individuals. If a new partner can be found within 90 days, the LLP can remain. Otherwise, the LLP will need to be dissolved and the business re-registered as an LLC or sole proprietorship.
Is an LLC or LLP best for my business?
There are two main things to consider when deciding whether an LLC or LLP is best for your business: liability and taxes. If these two things take preference for you then you’re more likely to benefit from forming an LLC. This way you’ll have flexibility in the way you run your business and gain from tax benefits. But if multiple partners run your business, you want liability protection from them, and your state allows you to set up an LLP, you may find that registering as an LLP is more suitable.
LLCs and LLPs are two very different types of business entities. There’s not one that suits everyone. This is why you should do your research and understand the pros, cons, and associated costs of both before deciding which one will form the basis of your business.