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Choosing between an LLP and an LLC

If you are starting a new business, you have many different ways of organizing it to suit your situation. If your organization is a partnership of some kind, one of the most important choices you have to make is whether you want it to be a partnership or a corporation.

The choice between a limited liability partnership, or LLP, and a limited liability corporation, or LLC, comes down to a few simple distinctions. They are important primarily for taxation and liability reasons, but also affect the operational structure of the business itself.

Characteristics of an LLC

An LLC is a kind of corporation, or a distinct legal entity from any of the owners in the business. As such, it has to be registered with the Louisiana Secretary of State. It also has to file a Form 1065 Return of Partnership income every year with the IRS. All income is passed through to one or more of the members and subject to their own personal income tax rate.

The fees and book-keeping overhead are the main drawbacks to an LLC. The structure of the business is determined by the operating agreement, which needs to specify ownership shares and responsibilities among other things.

The main advantages are the flexibility and shielding which comes from being a distinct legal entity. The members of an LLC are not held responsible as individuals for liabilities accrued by the LLC. It is also possible to add new members to the organization’s governing body as is necessary.

Characteristics of an LLP

The LLP is a partnership, and as such is not a completely distinct legal entity. It does not have to be registered as such and does not have the same reporting requirements as an LLC. Income is also passed through to the partners.

Since it is not a distinct legal entity, one or more of the managing partners are responsible for all liabilities of the LLP. It is possible to have junior, or non-managing partners, who do not share that liability.

The reporting requirements for an LLP are like any partnership, and are very limited. It is also governed by an operating agreement, but there is even more flexibility in the structure due to the lack of reporting and accounting that is necessary.

Which is right for you?

Most business choose the LLC because of the shielding from liability that comes with being a corporation. This is a distinct advantage for any operation that deals with the public, such as a retail store, and has premises liability as a result.

Partnerships such as the LLP can be kept closer to the chest, and financial results are not subject to as much public scrutiny. It can also be easier to obtain credit, as it will be based on the financial standing of the managing partners and not a new legal entity.

Determining which structure is right for your business is difficult. Consultation with a business formation attorney can help you make the right choice as well as to help you work through the necessary operating agreements.

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