When a company is formed, there are several different options for the way that entity is legally structured. Each of these has their own distinct advantages and disadvantages.
For a small business owner, deciding which of these legal structures you should adopt for your own company can be confusing, especially because many of them have similar names. Find out which one is best for your business by using the following guidelines and tips.
Is a Limited Partnership the Same as an LLC?
Take limited partnerships and limited liability companies, also called LLCs, for example. These two business structures sound a lot alike. Add limited liability partnerships to the mix, and the entire thing can be very confusing. But don’t let the similarity in names confuse you. The short answer is that while limited partnerships, limited liability partnerships, and limited liability companies do share some characteristics, they are completely different. Here is what you need to know.
Limited Liability Company
A limited liability company (LLC) is like a sole proprietorship because income is treated as a pass-through on owner tax returns. However, there are some important differences that you should note. The LLC structure provides a certain amount of liability protection that a sole proprietorship does not offer, meaning that an LLC limits or diffuses the level of which owners are liable in the company. It also allows there to be several owners – called “members” – and for those owners to divide their ownership in whatever way they see fit.
The biggest downside is that members have to pay self-employment taxes on the income they receive from the limited liability company. Your attorney will know the various facets of the law surrounding LLCs, and that attorney can help you decide if becoming an LLC is right for your business.
Limited partnerships (LPs) have the same tax advantages as limited liability companies, but the inherent structure is different. LPs require that owners that have a managerial role or other active position in the running of the business be liable for it. Silent partners, called limited partners, are excused from personal liability, but they can lose their investment in the LP company. Your attorney can help explain these differences to you so that you can make the best decision for your business.
Limited Liability Partnership
In contrast, a limited liability partnership (LLP) is made up of members who share the management of the company but each one has liability protection so one member’s actions do not impact another member. They can still divide their ownership of the LLP in any way they like. This legal structure is often seen in professions such as law or accounting.
Limited liability companies have some important differences from limited liability partnerships and limited partnerships. Make sure that you understand all the ins and outs before you commit to a legal structure for your business. Estate Planners of Arkansas, P.A. can help you weigh the pros and cons of each one. Contact us today at (501) 414-8965 to request a free consultation and see how we can help you.