If you are an entrepreneur who is about to start your own business, you are probably faced with the challenge of deciding the best model for your business. In the past, there were only two options available for anyone planning to start a business, these are;
Unlike in the past, there are several options available for you as an entrepreneur to explore. There are:
- Limited liability company (LLC)
- Limited partnership company (LLP)
- Limited partnership (LP)
- S corporation
- C corporation
For the purpose of the topic, we will focus on LLC and LLP. You will be able to decide which is best for you after reading this article.
What is a Limited Liability Company?
A limited liability company is a form of corporate organization that the company’s liability is not shared on the owners. An LLC is seen as an advanced business organization that combines the best of partnerships, corporation, and sole proprietorship. Therefore, all members of an LLC are entitled to limited liability. Members of an LLC include individuals, corporations, trusts, partnerships, other LLC’s and many more entities.
LLC’s are more flexible than corporations because they allow as many members as are willing to join as possible. Likewise, there is an advantage of pass-through taxable income – which is a feature that is similar to that of partnerships.
Setting up an LLC is relatively easy when compared to setting up a corporation, and it gives members better protection and flexibility. Profits and losses are shared as the personal income of members. In LLC, the tax is not calculated on the company; instead, it is deducted from the member’s income.
There is no unique formula for sharing profit in an LLC. LLC’s are more flexible in terms of formalities. There is no mandatory shareholders meeting, directors meeting, or annual report.
Pros of a Limited Liability Company
Below are the benefits of setting up an LLC company.
Members of an LLC are not liable for operations of the company. What this means is that their personal assets cannot be touched by creditors.
The profit an LLC makes is shared directly by members without the company paying any tax to the government. The tax is instead deducted from member’s federal income.
Easy to Start up and Maintain
There is no particular expertise required to set up an LLC. Even the fee and all paperwork are light.
Cons of a Limited Liability Company
The major disadvantage of LLC is the difficulty in removing a member. To remove a member, the entire LLC has to be dissolved and a new one formed with the remaining members. This is not in any convenient.
What is a Limited Liability Partnership?
A limited liability partnership is a unique form of business that joins the benefits of partnerships and corporation type of business. There are several forms of business partnerships, but an LLP is different from them.
All members of an LLP share equal roles and responsibilities. Since LLP is a partnership form of business, it is not as flexible as an LLC. All members of an LLP share equal limited liability. In LLP, all members have the right to participate in the management of the business. This is an important point to note because there is another form of partnership that is similar to this, limited partnership, LP. In LP, all the management and control is handled by at least one of the members known as general member(s) partnership while others are mere financial members.
One prominent feature of an LLP is that it stands as a separate legal entity. Therefore, a limited liability company can own property, sue and be sued. The limited liability status of LLP offers protection for general members from claims against the company. Because LLP is a separate legal entity, general members are protected against losing their assets even when one member of the partnership issued to court, and a judgment is pronounced.
LLP allows members to have junior partners that work for individual members. These junior partners are not part of the decision makers. They earn a salary from the business. They are qualified professionals appointed to do the work partners bring
Partners can remove and add more members. This is because of the partnership agreement, and it also allows partners to be retired. There is also no date of termination in an LLP agreement. One big point to note here is that an LLP can add partners that bring values of a new business. This is reasonable since one of the ideas of forming a partnership is to maximize profit. However, all existing have to come to an agreement before a new partner is added.
Pros of Limited Liability Partnership
Pass- through Taxation
Taxation in LLP I similar to that of LLC is all ways. Tax is deducted from individual members of the partnership.
LLP gives protection to the partners from being responsible for the wrongdoings of other partners. In addition, they are free from any liability such as the debt of the company.
Many Numbers of Partners
The number of partners in an LLP is not limited. Members can be as many as possible. This is a big advantage should in case any problem develops in the future.
Cons of Limited Liability Partnership
A lot of legal paper works is involved in starting an LLP, and this is because of its legal status. The strength of an LLP is dependent on the commitment of all members, so the withdrawal of one or more partners will terminate the whole partnership. Another significant disadvantage is that LLP is limited to certain professions.
Types of LLC and LLP Businesses
Generally, all kinds of businesses can be a limited liability company. However, there is an exception of a professional partnership of doctor’s office and law firms, accountants, and architects. Instead, they will form a limited liability partnership.
Choosing between LLC and LLP for your Business
Almost all businesses can benefit from LLC and LLP because of the protection they offer members which include pass-through taxation, limited liability, and flexibility.
However, determining the best for your business is dependent on the type of business you plan you have. LLP is limited to certain professions, so if your company does not fall in that profession, you will have to settle with LLC.