LLC vs LLP vs Inc: Key Differences Explained

Key Takeaways

• LLPs are designed mainly for licensed professionals (lawyers, accountants, doctors) and provide liability protection against other partners’ misconduct but may have restrictions by state law.
• LLCs are highly flexible, allow unlimited members, and can elect their tax status (default pass-through, C corp, or S corp).
• Corporations (Inc.) can issue stock, attract investors, and offer stronger continuity, but come with stricter compliance requirements and potential double taxation for C corps.
• Sole proprietorships are simple to start but provide no liability protection, leaving personal assets exposed.
• Liability protection varies by entity type; piercing the corporate veil can still put owners’ assets at risk if laws are not followed.
• When comparing LLC vs LLP vs Inc, consider liability needs, taxation, ownership flexibility, and growth goals.

Limited Liability Partnership

A limited liability partnership (LLP) has two or more owners and offers limited personal liability for business obligations. This business structure is a common choice for licensed professionals such as doctors and attorneys. In some states, only certain professionals can form an LLP.

As a pass-through tax entity, an LLP requires its owners to report profits and losses on their individual tax returns. Income earned through an LLP is taxed at the self-employment rate of 15.3 percent. In some locations, you may be required to pay franchise or excise taxes.

An LLP can have any number of partners, but new partners can only be added at specific times and often with a buy-in.

LLP costs typically include:

• $50 to $500 initial filing fee
• Up to $820 annual fee
• Up to $1,000 tax preparation fee

An LLP can have either a centralized or decentralized management structure but must hold annual meetings and submit minutes and annual filings. Members receive a Schedule K-1 that indicates the profits and losses that must be reported on the individual tax return.

When starting an LLP, you must demonstrate that all your members have the required licenses and qualifications as dictated by state law.

LLP Pros and Cons

An LLP can be appealing for professionals who want the benefits of shared management while avoiding liability for another partner’s negligence. However, there are trade-offs:

Advantages of an LLP:

• Protection from other partners’ malpractice or negligence.
• Flexibility in structuring management duties and profit distribution.
• Pass-through taxation, avoiding corporate double taxation.
• Allows multiple owners, unlike an LLC in some states where single-member entities are more common.

Disadvantages of an LLP:

• Limited availability: often restricted to professional groups like attorneys, doctors, or accountants.
• Must comply with stricter state licensing requirements.
• Partners may still be personally liable for their own professional misconduct.
• More complex to dissolve compared to sole proprietorships or partnerships.

Limited Liability Company

The limited liability company (LLC) is popular for small businesses because this structure has few member (owner) restrictions, advantageous tax treatment, and simple set-up. This entity also commonly serves as a real estate holding company.

While an LLP is always subject to pass-through taxation, an LLC can choose to be taxed either as a pass-through entity, a standard corporation, or an S corporation.

Any income earned through an LLC is taxed at the self-employment rate of 15.3 percent. In some locations, you may be required to pay franchise or excise taxes.

An LLC can have any number of members, and new members can buy into the company at any time.

The average costs to start an LLC are as follows, but vary by state:

• $50 to $500 initial filing fee
• Up to $820 annual fee
• Up to $1,000 tax preparation fee

Another advantage of an LLC is the ease of administration. Most states require only annual filings and do not require annual meetings or submission of minutes. Each LLC member receives a Schedule K-1 with his or her share of profits and losses, which are then reported on the individual tax return.

LLC Key Features

An LLC offers more operational freedom than an LLP or Inc., making it one of the most popular structures for startups and small businesses.

Key highlights of an LLC include:

• Flexible ownership: Can be single-member or multi-member, with few restrictions.
• Tax flexibility: Default pass-through taxation but can elect C corp or S corp treatment for tax advantages.
• Management options: Members can manage directly, or appoint managers.
• Limited liability: Protects members from business debts and lawsuits, unless corporate formalities are ignored.
• Ease of compliance: Fewer formalities than corporations; no annual meeting requirements in most states.

However, LLC owners must pay self-employment tax on business income unless structured as an S corp. Additionally, some states impose franchise taxes or gross receipts fees on LLCs.

C and S Corporations

C corporations, also known as standard corporations, are generally used for larger companies. They can have unlimited shareholders and establish tiers of voting privileges. This makes a corporation ideal for businesses that plan to grow by seeking investors.

Small and medium-sized businesses can choose to establish an S corporation. This entity must have 100 or fewer shareholders. S corporations are taxed as pass-through entities, unlike C corporations which are taxed at both the individual and corporate levels.

Corporation Advantages and Challenges

Corporations (Inc.) are the most formal structure, offering distinct benefits and burdens:

Advantages of Incorporation:

• Ability to issue stock and attract venture capital or public investment.
• Strong continuity; the entity survives beyond the involvement of original founders.
• Clear separation between owners (shareholders) and managers (board of directors and officers).
• More credibility with lenders, investors, and clients.

Challenges of Incorporation:

• C corporations face double taxation (profits taxed at corporate level, then dividends taxed again to shareholders).
• S corporations avoid double taxation but are limited to 100 shareholders, who must be U.S. citizens or residents.
• Requires annual shareholder meetings, board meetings, and detailed record-keeping.
• Generally more expensive to form and maintain compared to LLCs and LLPs.

Sole Proprietorships

A sole proprietor can operate independently in most states as long as he or she has the required licenses and permits for the business in question. Because you have not established a separate legal business entity, however, you are personally responsible for all business debts and obligations. Many sole proprietors opt for a structure that provides liability protection when their businesses grow.

Sole Proprietorship vs Other Structures

While a sole proprietorship is the simplest form of business ownership, it lacks the liability protection of LLCs, LLPs, and corporations. This means that personal assets such as your home, car, or savings can be seized to satisfy business debts.

By contrast:

• LLCs and LLPs separate personal and business assets, offering peace of mind.
• Corporations provide the strongest liability shield but come with higher regulatory burdens.

For entrepreneurs testing a business idea, a sole proprietorship may be adequate in the short term. But as operations expand, transitioning to an LLC or corporation is often a wise step.

Understanding Liability

Both LLPs and LLCs are desirable because of the personal liability protection they offer to owners. If the business is in debt or must pay a legal judgment, the personal assets of the owner cannot be seized. Some exceptions exist, such as when owners engage in daily business operations.

When the so-called corporate veil is pierced, liability protection may be void. This includes situations in which:

• Fraud is committed against investors, vendors, or clients.
• The company is administered improperly according to the state's LLC laws.
• Business and personal funds are kept in the same accounts or otherwise commingled.
• Company bills have been paid with personal funds.
• The company did not possess sufficient capital at the time of formation.

Choosing Between LLC vs LLP vs Inc

When evaluating LLC vs LLP vs Inc, consider:

1. Liability Protection:
   • LLCs and corporations shield owners from most business debts.
   • LLPs protect partners from others’ misconduct but may have professional liability exposure.
2. Taxation:
   • LLCs: flexible (pass-through, S corp, or C corp).
   • LLPs: generally pass-through only.
   • Corporations: C corps taxed twice; S corps avoid double taxation with restrictions.
3. Ownership and Growth:
   • LLCs: unlimited members, including individuals and entities.
   • LLPs: usually limited to licensed professionals.
   • Corporations: best for attracting large investors or going public.
4. Compliance and Costs:
   • LLCs: fewer formalities, moderate fees.
   • LLPs: may require annual reports and professional licenses.
   • Corporations: most formal, with extensive reporting and governance duties.

Your decision should align with your business goals: small firms often prefer LLCs, professional practices may choose LLPs, and companies seeking outside funding typically incorporate.

Frequently Asked Questions

1. Which is better: LLC or LLP?
   LLCs are more flexible and widely available, while LLPs are usually limited to licensed professionals such as lawyers or doctors.
2. Why would a business choose Inc. over LLC?
   Corporations (Inc.) can issue stock and attract investors, making them ideal for companies seeking growth or eventual public offering.
3. Can a single person form an LLP?
   No, an LLP requires at least two partners. If you’re starting solo, an LLC is usually the better option.
4. Do LLCs and corporations both protect personal assets?
   Yes, both structures protect owners’ personal assets from most business liabilities, as long as legal requirements are followed.
5. What’s the biggest tax difference in LLC vs LLP vs Inc?
   LLCs and LLPs typically enjoy pass-through taxation, while C corporations face double taxation unless they elect S corp status.

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