Building Your Business Becoming an Owner Business Types What Are the Key Differences Between an LLC and an LLP? LLC vs LLP Differences in Ownership, Liability, Taxes, and More By Jean Murray Jean Murray Facebook Twitter Jean Murray, MBA, Ph.D., is an experienced business writer and teacher who has been writing for The Balance on U.S. business law and taxes since 2008. She has taught accounting, business law, and business finance at business and professional schools for over 35 years, has authored several books on saving money and simplifying your business, and was the owner of startup-focused company Emence Enterprises, LLC. learn about our editorial policies Updated on October 10, 2019 Share Tweet Pin Email In This Article View All In This Article What’s the Same? Key Differences Key Advantages of LLCs and LLPs Which to Choose–an LLC or LLP? What is a small business and why it matters. Photo: Hero Images/Getty Images As you think about starting a new business, you may have seen confusing information on a Limited Liability Company (LLC) and a Limited Liability Partnership (LLP). These two business types may look the same at first glance but there are some key differences between LLC and LLP business types. What’s the Same about LLCs and LLPs? Before we look at differences here are similarities between the LLC and LLP business types, look at how they are similar. Both business types are pass-through business types, with owners paying income tax on their share of the business profits (or losses). Although LLCs and LLPs don’t have a board of directors, these businesses must keep good business management records and have regular recorded decision-making meetings, to assure that the business is clearly separate from the owners. Owners of both LLCs and LLPs must pay self-employment tax (Social Security/Medicare) on their income from the business each year. The fees for forming each type of business are usually similar for each state, but they also have some variation. Attorney fees for helping with the formation of the business and preparing ownership agreements depend on the size and complexity of the business and on state laws. Each business must have an operating document that directs the decision-making process and answers what-if questions. This document includes: The duties and responsibilities of ownersDay-to-day managementWhat happens if an owner leavesHow profits/losses are divided among owners For the LLC, this document is called an operating agreement; for an LLP it’s a partnership agreement. Key Differences Between LLC and LLP Businesses Starting an LLC vs. an LLP Businesses in the U.S. must register as a specific business type (LLC registration or LLP registration) with a specific state (except for the sole proprietorship). All states allow LLCs, but they may restrict ownership of LLPs to specific groups of professionals (accountants, attorneys, architects, etc.) with different professionals allowed in each state. California, for example, allows only groups of architects, surveyors, lawyers, public accountants, or engineers to form an LLP. Ownership of LLCs vs. LLPs Owners of an LLC are called members, not partners, and an LLC can have one or more members. As in other types of partnerships, LLP partners can be general partners or limited partners. General partners participate in the ownership of the business, while limited partners only invest but don’t participate in management. One individual or several individuals can own an LLC. An LLC can also be owned by an organization, trust, non-US citizen, another LLC, or another legal entity. Only individuals can become owners of a partnership, including an LLP. LLC vs. LLP Taxes An LLC with more than one owner is considered a partnership for tax purposes only. This means that taxes for both LLPs and multiple-member LLCs are normally prepared using a partnership tax return. After the net income of the partnership is calculated and reported on an information return (IRS Form 1065), the profits or losses are divided between the owners based on their percentage of ownership. Each owner receives a Schedule K-1 for his or her ownership share, to be included in the owner’s personal tax return. Note An LLC (but not a partnership) may elect to be taxed as a corporation or an S corporation. In this case, all business activities–except taxes–are continued as for a normal LLC. Get help from a CPA or tax attorney if you are thinking of this tax option. Liability Protection for LLC and LLP Owners LLC and LLP business types are set up to offer their owners protection against liability for debts of the business, and the owner’s personal liability is limited to his or her investment in the business. Limited partners in an LLP have limited liability as long as they remain passive investors (not active in running the business). The separation of a business like an LLC or LLP from its owners creates a shield against owner liability. But this shield can be broken if the business doesn’t keep good business records or it mixes up business and personal transactions. If the liability protection shield is broken, the owners can become personally liable for debts of the business or for lawsuits against the business. Key Advantages of LLCs and LLPs Business Ownership–LLCs have an advantage over LLPs because they can be owned by one or more individuals and other legal entities, while LLPs are usually restricted to specific types of owners (usually, individuals in certain types of professions, depending on the state). Liability protection–LLPs have an advantage if some owners want more passive ownership with no management responsibility and lower liability as limited partners. All LLC owners have the same liability protection unless an owner is a manager.Taxes–LLCs have the advantage of being able to be taxed as a corporation or S corporation. This ability to be taxed as a corporation can be an advantage if the business is making a profit. Which to Choose–an LLC or LLP? Many small businesses select the LLC form because it is flexible for ownership and tax purposes. But if you have a professional group, you might find the LLP a possibility. Take all factors into consideration. Bottom Line Every business is unique, the tax situation of a business can change, and business regulations vary by state. Discuss possible business types with both your attorney and tax professional before you make any decisions. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Department of Treasury Internal Revenue Service. "LLC Filing as a Corporation or Partnership," Accessed Oct. 10, 2019. California Secretary of State. "Application to Register a Limited Liability Partnership (LLP)," Accessed Oct. 10, 2019. Department of Treasury Internal Revenue Service. "Form 1065," Accessed Oct. 10, 2019. Office of Chief Counsel Internal Revenue Service. "Memorandum 201640014," Accessed Oct. 10, 2019.