Starting a business in the United States requires choosing the right legal structure. Two of the most common and beneficial options for entrepreneurs are the LLC (Limited Liability Company) and the LLP (Limited Liability Partnership). But what do these terms mean? How do they differ? And which one is right for your business?
This guide breaks down the definitions, key features, benefits, and differences between an LLC and an LLP to help you make an informed decision.
What Is an LLC?
An LLC (Limited Liability Company) is a popular legal structure for small and medium-sized businesses. It combines the limited liability protection of a corporation with the tax flexibility of a partnership or sole proprietorship.
Key Features of an LLC:
- Limited Liability: Owners (called “members”) are generally not personally responsible for business debts or lawsuits.
- Flexible Taxation: LLCs can choose to be taxed as sole proprietorships, partnerships, or corporations.
- Fewer Formalities: Compared to corporations, LLCs require fewer administrative requirements.
- Ownership Flexibility: An LLC can have one owner (single-member LLC) or multiple owners (multi-member LLC).
LLCs are widely used across various industries in the U.S. because they offer legal protection with minimal complexity.
What Is an LLP?
An LLP (Limited Liability Partnership) is a business structure typically used by professional service providers, such as lawyers, doctors, or accountants. Like an LLC, it provides limited liability to its partners, but with some differences.
Key Features of an LLP:
- Limited Liability for Each Partner: Partners are protected from the negligence or misconduct of other partners.
- Management by Partners: Each partner has the right to participate in management unless stated otherwise.
- Tax Pass-Through: Like LLCs, LLPs enjoy pass-through taxation, meaning profits are reported on each partner’s individual tax return.
- Professional Use: LLPs are often restricted to licensed professionals in certain states.
LLPs are not allowed in every U.S. state, and the rules around them vary significantly.
What Are the Main Differences Between LLC and LLP?
| Feature | LLC | LLP |
|---|---|---|
| Ownership | Members (can be individuals or entities) | Partners (usually licensed professionals) |
| Management | Can be managed by members or managers | Typically managed by partners |
| Liability Protection | All members protected | Partners protected from others’ misconduct |
| Taxation | Pass-through by default, but flexible | Pass-through only |
| Use Case | Common for startups and small businesses | Common for professional firms |
Pros and Cons of an LLC
Pros:
- Strong liability protection
- Flexibility in ownership and taxation
- Simpler compliance compared to corporations
Cons:
- Must file formation documents with the state
- Some states charge annual fees or franchise taxes
Pros and Cons of an LLP
Pros:
- Protects individual partners from the actions of others
- Suitable for joint ventures between professionals
- Pass-through taxation
Cons:
- Not available in all states
- Usually limited to certain professions
- May require professional licensing
When Should You Choose an LLC?
An LLC is ideal for small businesses, startups, and solo entrepreneurs who want liability protection and flexibility. It’s also perfect if you’re not part of a licensed profession like law or medicine.
When Should You Choose an LLP?
An LLP makes sense if you’re starting a business with other licensed professionals, such as forming a law firm or an accounting practice. It allows each partner to operate independently without being liable for another partner’s actions.
FAQs About LLC and LLP
Q: Can an LLC be owned by one person?
A: Yes, a single-member LLC is allowed in all 50 states and is a popular choice for solo entrepreneurs.
Q: Can a non-resident open an LLC or LLP in the U.S.?
A: Non-residents can form LLCs in the U.S. without U.S. citizenship. However, LLPs may have restrictions depending on the state and profession.
Q: Is an LLP more expensive to form than an LLC?
A: Not necessarily. The cost depends on the state, but LLPs may have additional requirements such as professional licenses or insurance.
Q: Where can I check if my business qualifies for an LLP?
A: You can find out through your state’s Secretary of State website or by consulting a business attorney.
Final Thoughts
Choosing between an LLC and an LLP depends on your business type, professional status, and long-term goals. While LLCs offer flexibility and wide applicability, LLPs are better suited for licensed professionals working in partnership. Either structure provides important liability protection and tax benefits—so understanding the differences is critical to making the right choice.
Before deciding, it’s a good idea to consult with a legal or tax professional and check your state’s requirements through official government channels like:
By choosing the right structure from the start, you’ll be setting your business up for long-term success in the U.S. market.