Talking LLP vs LLC: Differences in Taxes and Pros and Cons

Limited liability partnerships and limited liability companies have the same tax protection and have similar business structures. The “pass through” taxation that both LLP and LLC entities have allow all partners to claim their profits and losses on their personal taxes. The partners are also protected from any negligence that any other partner has done as part of the organization.

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LLP vs LLC-Benefits

One of the many benefits of LLP vs LLC is that the LLP has a more stable structure. The LLP business structure requires two or more partners to be a proper entity. The advantage to this type of structure is the shared liability. This also decreases the risk involved with running a business. When you compare the tax liability between LLP vs LLC it can be clearly seen that an LLP has a distinct advantage over an LLC.

The benefit of not being taxed twice on the same income is probably the best benefit of both business structures, but is more common with the LLP business structure. Flexibility in investment is a good benefit as partners can choose how they want to invest in the business. This flexibility is tempered somewhat when you consider that at least one or more partners need to be fully invested in the business in an LLP.

LLP vs LLC-Drawbacks

The tax benefits that are realized with forming an LLP vs LLC organization are minimal when you factor in state taxes. Some states don’t even recognize LLPs as a business entity while other states set up tax limits and impose additional taxes on partnerships.

The tax flexibility is often cited as a reason why someone may choose to form an LLC. The drawback for this is self-employment taxes. Self-employment taxes are higher than corporate taxes. A distinct disadvantage of an LLP vs LLC organization is that partners are not obligated to consult with each other over business agreements. This could be a major problem if someone signs an agreement that costs the business money or puts the business in “hot water.”

LLP vs LLC – Tax Considerations

The major difference between LLP vs LLC is that in some states LLP organizations are liable for partnership debts. LLC members are not liable for business debts and are protected from seizure of personal assets for business debts.

LLP businesses can’t be set up as corporations but LLC businesses can. This can make a big difference when tax time rolls around. Corporations can be taxed as a business entity. The advantage of setting up an LLC as a corporation is the structure.

The Advantages of LLP vs LLC

Professional associations often form an LLP business structure because of its stability. LLPs unlike LLCs are formed when two or more professionals decide to share costs and have built up a reputation in the community. Many LLCs are formed because someone wants to take advantage of the limited liability that the LLC provides them.

Freedom from state mandated membership and management requirements is one of the best advantages the both business structures enjoy. LLP organizations benefit silent partners because they are not liable for business debts but can reap the rewards of the business.

Since the business is not taxed directly when filing as an LLC, stakeholders can choose how they would like to be taxed. This is good because of the opportunity to structure how the organization handles its taxes. If you plan to be taxed as sole proprietorship or as a partnership, taxes can be claimed on individual tax forms.

Limited liability partnerships have the distinct advantage of being able to add or remove partners as the business grows. Junior partners provide the support the business needs and free up partners to pursue new clients. In this way everyone benefits from the growth and has stake in the business.

Disadvantages of LLP vs LLC

Business structure is an important component for setting up any business. The decentralized management structure of an LLP can cause some confusion especially when there is a disagreement among managing partners.

Limited liability companies that are not run as corporations risk dissolution when a member dies or resigns. LLCs have issues with establishing roles within the organization. This can cause confusion when it comes to resolving issues and providing needed support. The fact that members can choose what roles they will play in the business and how much support they will place in the business can cause instability within and without the organization.

Profits aren’t taxed at a corporate level for either the LLP or the LLC except when it forms as a corporation. This means that all partners are subject to paying all the state and federal taxes themselves as part of their personal income tax.

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Tax recognition-LLP vs LLC

LLCs are not recognized as a tax-filing entity but need to file as a sole proprietorship, a partnership or as a corporation. The benefit of an LLC is that you can separate personal assets from business assets so you’re not liable for business debts. LLCs need to report this revenue and any earnings from the organization on a Form 1065. LLC has the advantage of being able to adjust their business revenue at a corporate level if they establish the organization as a corporation.

Most LLCs however file as partnerships to avoid paying taxes on the same income twice. An operating agreement is necessary to establish how the organization wants to be taxed. Banks and insurance companies are a few of the organizations that can’t be LLCs. The IRS automatically registers an LLC that has more than one member as a partnership.

Because some states won’t allow LLPs to operate in their region, it is sometimes difficult to maintain this type of business structure. The IRS doesn’t have a section on LLPs either as many states don’t recognize it as a legitimate business. Every state has different regulations regarding LLCs, which does have a section on the IRS website.

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