Difference between Limited Liability Corporation and Limited Liability Partnership

One of the key advantages of limited liability partnerships (LLPs) is that it minimizes the risk borne by each member of the partnership. But, LLPs still impose certain obligations from each of the partner as a way of maintaining standards of accountability. LLPs differ from other general partnerships in one particular aspect, namely, that each partner is only liable to his/her own debts and obligations and are not required to share the burden of their partners’ debts and obligations. In the United States, there are comprehensive legislation that govern the conception and formation of LLPs. This form of partnership is more suitable to companies offering professional services such as law firms, an accountancy firms, etc. As a matter of fact, a few states within the United States allow only certain professional classes to form LLPs. The primary legislative document that deals with partnership firms is the Uniform Partnership Act, which provides detailed guidelines. Further, many states offer liability protection only against select negligence claims, which implies that for, say, contract claims, a partner can be made liable. LLPs are similar to other partnership arrangements in that the profits accrued are divided evenly among all the members of the partnership. This is essentially to facilitate taxation and to avoid double taxation, which can dent an individual member’s profits. Some state legislation adds more conditions for limited liability. For example,

“Many states provide protection only against TORT claims and do not extend protection to a partner’s own negligence or incompetence or to the partner’s involvement in supervising wrongful conduct. Other states provide broad protection, including protection against contractual claims brought by the partnership’s creditors. It further provided, however, that a partner was personally liable to the partnership and copartners for any breach of duty, and also allowed a creditor or other claimant to pierce the limited liability shield of a partner in the same way a claimant may pierce the corporate veil of a corporation and personally sue an individual member of the corporation.” (www.wisegeek.com, 2009)

Limited Liability Corporations (LLCs), on the other hand, differ from LLPs in one crucial aspect. The corporation as a whole is limited in its liability toward stakeholders. These stakeholders include suppliers, distributors, customers and other clientele. LLCs are particularly suitable for businesses with large turnover that can take advantage of taxation benefits under LLC. The LLC was introduced in the United States later than other conventional forms of company formations. The LLC business structure “combines the limited personal liability feature of a corporation with the single taxation feature of a partnership or sole-proprietorship firm. Its profits and tax benefits are split any way the stockholders/ shareholders (whether individuals or other firms) choose” (www.irs.gov/businesses, 2009). Furthermore, it is necessary to provide information to the Internal Revenue Service only for purposes of transparency with the general public. Here too, the individual shareholder of the LLC files a separate tax return with the IRS. Again, as with LLPs, there are different sets of laws apply across state jurisdictions. The proprietors of an LLC are called its members. Further,

“Owners of an LLC are called members. Since most states do not restrict ownership, members may include individuals, corporations, other LLCs and foreign entities. There is no maximum number of members. Most states also permit ‘single member’ LLCs, those having only one owner. A few types of businesses generally cannot be LLCs, such as banks and insurance companies. There are special rules for foreign LLCs.” (www.irs.gov/businesses, 2009)

As for my preference between LLCs and LLPs, the nature and size of the organization would help decide the best arrangement. For example, if I am a certified professional, like a lawyer, architect or accountant, and decide to form a company with my fellow professionals, then LLPs would be the ideal formation. On the other hand, if the focus of the company is manufacturing and production as opposed to offered services, then LLCs would be the ideal choice. Generally, LLCs are suitable for large business enterprises, whereas LLPs would be the preferred choice for smaller professional arrangements among peers. Hence, if I were to set up my own business, then factors such as employee composition, nature and size of business would decide which arrangement is the best. The geographical spread of the business is also an important factor in choosing of the two company formations. Usually, for transnational business enterprises, LLCs can offer more taxation benefits and flexibility.

References:

Internal Revenue Service, Business Types, retrieved from on 28th May, 2009

Definition of Limited Liability Partnerships (May, 2009), retrieved from on 28th May, 2009