What is the Difference Between a LLC and a LLP?

Malcolm Tatum

When thinking about starting a business, the issue of how to structure the entity to best advantage is often one of the first issues that owners address. Among the several options available in most nations are the limited liability corporation and the limited liability partnership. While a LLC and a LLP share some characteristics, there are a few differences that may be important to the selection process, including the degree of liability protection that each model provides.

Businessman giving a thumbs-up
Businessman giving a thumbs-up

In order to understand the differences between a LLC and a LLP, it is first necessary to have an idea of what each approach offers. With a limited liability corporation, the structure aids in protecting the company as a whole in the event that some sort of liability is incurred, due to the negligent actions of one or more officers or executives of the company. In contrast, the limited liability partnership offers additional protection for each partner, in the event that another partner is found to be negligent in some type of business dealing that involves the company. Depending on the exact nature of the negligent acts, only the partner who is found liable for the activity will be subject to fines, or be responsible for settling any lawsuits that are associated with the negligence.

It is important to note, when comparing the relative merits of a LLC and a LLP that while the limited liability partnership may offer some additional protections from liability for each partner, that does not mean that some degree of liability will not be assumed by someone other than the negligent partner. Depending on the regulations and laws that apply in the area in which the company operates, there are circumstances in which partners in the LLP will also be held liable for certain actions.

When weighing the benefits of a LLC and a LLP, it is important to be aware of any of these possible exceptions. For example, if an accounting firm is organized as a limited liability partnership and one of the partners is sued for malpractice, this will for the most part protect the other partners from also being liable for any judgment granted by a court of law. Should the scope of the malpractice lawsuit involve some sort of document signed by the partnership rather than the individual partner, that would open the door for the others to be held at least partially liable. In addition, if an employee who reports directly to a specific partner somehow adds to the negligence, that partner may also be held liable.

Another chief difference between a LLC and a LLP is that both options are not available in all jurisdictions, or there may be restrictions on what type of companies may be organized using these structures. For example, a jurisdiction may allow certain types of businesses to form as limited liability partnerships but bar the formation of those same businesses as limited liability corporations. This means that business owners and partners should look closely at local laws before attempting to legally form the business. By taking the time to explore the options that are relevant to their particular business type and allowed by local laws, making a choice between a LLC and a LLP format will be much easier.

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