Difference Between Limited Liability Company LLC and Limited Liability Partnership LLP

LLCs and LLPs are two of the most common legal structures for small businesses. Both types of businesses are pass-through entities, meaning that the owners pay income tax on their portion of the earnings. The partnership agreement governs the internal system of governance of an LLP, whereas the statute governs the internal system of governance of an LLC.

Limited Liability Company LLC vs Limited Liability Partnership LLP

The main difference between Limited Liability Company LLC and Limited Liability Partnership LLP is that a minimum of one member is required to form an LLC. An LLP, on the other hand, requires a minimum of two members to form. A limited liability company’s name must have the letters “LLC” at the end. The limited liability partnership is required to include the letters “LLP” at the end of its name.

Limited Liability Company LLC vs Limited Liability Partnership LLP

LLC, an acronym for limited liability company is a type of corporation that shields its owners from personal accountability for the firm’s debts or obligations. Limited liability companies (LLCs) are hybrid businesses that combine the advantages of a corporation with those of a partnership or a single proprietorship. Corporations, individuals, foreign organizations, and other LLCs can all be owners of an LLC.

LLPs are a subtype of alternative corporate structure that offers the partners limited liability and minimal compliance expenses. It also permits the partners to create their internal structure in the same way that they would in a regular partnership. It is a legal entity that is responsible for all of its assets. An LLP is owned by its members, who are responsible for particular tasks, such as adhering to the partnership agreement.

Comparison Table Between Limited Liability Company LLC and Limited Liability Partnership LLP

Parameters of ComparisonLimited Liability Company LLCLimited Liability Partnership LLP
TypeIncludes features of both a corporation and a partnership.The partnership which is restricted to individual partners.
OwnersMembers.Partners.
SystemImmune from personal accountability.Partners are individually held accountable.
TaxHas to pay Income tax, dividend distribution tax, and minimum alternative tax.Has to pay taxes and the alternative minimum tax.  
Books of accountsMaintained on an accrual basis.An option between cash or accrual basis is available.

What is Limited Liability Company LLC?

LLC which is the short term of Limited Liability Company is a type of privately held corporation. It’s a hybrid structure since it combines the characteristics of a general partnership and a corporation. One of the most significant advantages of an LLC is the legal protection it provides. An LLC provides a financial barrier between the owner and the firm since it is regarded as a distinct corporate entity.

This implies that creditors of a company can’t go for the owner’s assets. Flow-through taxes eliminates the cascading effect, resulting in earnings being taxed just once, and in the hands of the members. On their tax returns, the owners report the company’s profits and losses. The LLC structure is used by all types of small enterprises.

Because many states mandate that firms with more than one owner organize as an LLC, the structure is excellent for small to mid-size enterprises with several owners. LLCs have the advantage of separating personal and legal assets and liabilities as compared to ordinary partnerships.

LLCs must declare their sales and earnings to the Internal Revenue Service on a Form 1065, which the IRS then compares to members’ tax returns. The regulations or statutes that apply to the LLC in that country control its internal organizational and managerial structure. The regulations governing an LLC differ from one nation to the next.

What is Limited Liability Partnership LLP?

LLP is a form of legal entity. Limited liability partnerships are frequently used by professional firms such as attorneys and accountants, but they can also be a good fit for other sorts of businesses. A limited liability partnership (LLP) is a legal body that differs from its members, who are solely responsible for the amount of capital they contribute along with any personal guarantees.

The partnership is registered with Companies House and may only be utilized by profitable enterprises. The formation of an LLP requires a minimum of two partners and has no upper limit. The tasks and obligations of the mentioned partners are defined by law and are governed by a contract or agreement between partners. A partnership can be formed and agreed to by an individual, company, or another LLP.

Professionals who employ LLPs place a high value on their reputation. The majority of LLPs are formed and managed by a group of experts with extensive expertise and clientele. The partners reduce the expenses of business while enhancing the LLP’s ability for expansion by pooling resources. They can share office space, personnel, and other resources. Most importantly, cutting expenses allows the partners to benefit more from their actions collectively than they might individually.

Main Differences Between Limited Liability Company LLC and Limited Liability Partnership LLP

  1. LLC is a privately held corporation with features of both a corporation and a partnership whereas LLP is a form of partnership in which every individual partner’s liability is restricted to the amount of money they invest.
  2. LLC members are the proprietors of the company whereas the partners own the LLP.
  3. Individuals in an LLC are immune from personal accountability for any debts or litigation brought against the company. Creditors and persons who have been directly injured by the firm are unable to sue any of the members of the business for debts but on the other hand in an LLP, partners are individually accountable for their carelessness, but only to the extent that it is caused by them. The activities of an individual are not the responsibility of the other. This indicates that each individual is protected from the other’s wrongdoings.
  4. The income tax, dividend distribution tax, and minimum alternative tax are all taxes an LLC has indeed to pay whereas the LLP is only responsible for paying taxes and the alternative minimum tax.
  5. The books of a limited liability corporation are kept on an accrual basis whereas LLPs have the option of keeping their accounts on a cash or accrual basis.

Conclusion

For the last decade, LLCs and LLPs have been popular since they offer their members a variety of possibilities. Because they combine the characteristics of a general partnership and a corporation, these two often seem similar. An LLP’s internal governance structure is governed by the partnership agreement, whereas an LLC’s internal governance structure is governed by the applicable legislation.

The corporate relations of an LLP are controlled by the partners, whereas the corporate relations of LLCs are maintained by the Board of Directors. Because of their structure and operating adaptability, these two business vehicles are ideal for small and medium businesses. The two organizational forms are also well-known among entrepreneurs, professionals, and service providers since they properly fulfill their interests.

References

  1. https://heinonline.org/HOL/LandingPage?handle=hein.journals/upitt57&div=12&id=&page=
  2. https://www.jstor.org/stable/40687778
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