Which Incorporation Is Best For You: Comparing LLPs and LLCs

Which Incorporation Is Best For You: Comparing LLPs and LLCs

By: Eric P. Rothenberg, Esq.

If you are a small business owner, or considering starting your own business, it has always been important to know your options for creating a new entity with limited liability. The uncertainty and financial stresses of COVID-19 and the subsequent recession make decisions about incorporation even more important.

In this article, I will review two common types of new entities for small businesses: limited liability partnerships (LLPs) and limited liability corporations (LLCs)

Limited Liability Partnerships (LLPs)

In a limited liability partnership there must be more than one partner. Each of these partners (called “partners”) receive personal liability protection as a result of creating the entity under the Secretary of State.

Governance of an LLP is shared equally among all partners, as are profits and losses, like a general partnership unless the operating agreement provides otherwise under the Uniform Partnership Act. An LLP is also taxed like a general partnership even though no partner is personally liable for the other partners as is true for a general partnership

In some states, only certain professionals like doctors and lawyers may form limited liability partnerships. This is not the case in the Commonwealth of Massachusetts which allows doctors, lawyers, CPA’s, architects etc to form an LLP.

Limited Liability Corporations (LLCs)

A limited liability corporation may have one or more “members” as opposed to partners. Unlike an LLP, it can be created with the option to have only one member, so an LLC may be an attractive solution for a sole proprietor looking to limit personal liability.

If an LLC has one member, it is taxed as a sole proprietorship, unless the member elects to be taxed as a corporation. If that election is made it can be taxed as either a C Corp or and S Corp. An LLC with two or more members is taxed as a general partnership by default. An LLC with more than one member may similarly choose to be taxed as a corporation.

An LLC offers flexibility in governance as well, with governing bodies and processes specified in the incorporation paperwork.

Which Is Right for My Business?

In addition to LLPs and LLCs, there are several other types of incorporation available to business owners. When choosing how to incorporate, it is important to have a partner who knows the law, knows business, and knows your specific needs. Call our office today to schedule a consultation. We can help you identify your needs and the best type of incorporation for your business, file paperwork, and address your business’s other legal needs.

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