One of the most important business decisions you might make is right at the start of your trading journey and that involves the decision as to whether you form an LLP or LLC.
It pays to take a look at the key differences when it comes to LLP vs LLC and when you understand how it might impact your future plans you can see why it can be so critical to pick the right option for your business.
Here is a look at the fundamentals of both options so that you can make an informed decision when registering your business in preparation for trading.
What does LLC mean?
One of your first things to check when looking at your options is to check your local state laws so that you are clear on what corporate structures are permissible in your area.
Having done that, you may decide to look at forming a limited liability company (LLC), which is a legal entity designed to afford you the protection that comes with being a corporation combined with the various tax benefits associated with a partnership arrangement.
These combined advantages tend to steer a good number of small business owners toward the LLC option.
Flexibility is there too with an LLC, as you can have more than one owner, and these so-called members can also be corporations as well as individuals, meaning it can be easier to raise funding and offer shares in your business.
What is an LLP?
The other main option is a limited liability partnership (LLP), which can be broadly described as somewhere between a partnership and a corporation.
You will often find a professional business such as an accountancy firm, for instance, will choose the LLP route as this option provides an element of limited personal liability alongside the advantages of having any number of partners (including silent partners) who may be investors or retired members who no longer have an active role in the management of the business.
A key difference between LLC and LLP is the fact that LLC members find it easier to retain control of the business themselves, which is commonly referred to as member management.
In contrast, an LLP can be viewed as a general business partnership. In this scenario, it is usual to allocate management duties across the various partners according to their various skills and strengths.
Another key point is the subject of personal liability with regard to business debts and litigation claims.
LLC members enjoy protection from personal liability and cannot be held individually responsible for debts and claims created and owed by the company. They might lose their investment if the business ceases to trade, but their liability is limited under the terms of the structure.
If you are a partner in an LLP you can be held personally liable if you are found to be negligent in your actions, but local state laws vary and you might actually be personally liable for partnership debts too.
Deciding whether to form an LLC or LLP is down to what your plans for the business are and which elements of liability are best suited to your circumstances.