What are the Advantages of a Limited Liability Company Over a Limited Liability Partnership?

 When it comes time to choose what type of entity you would like your business formed under, you have many options. These include partnership, corporations of various kinds, Limited Liability Company and Limited Liability Partnership. There are advantages and disadvantages to each entity type, and the correct selection is usually a function of your specific circumstances and the type of business that you are operating. When comparing Limited Liability Companies to Limited Partnerships, there are certain types of businesses that are more natural fits for each. Limited Liability Companies, or LLCs, is the organizational structure that is frequently chosen by small businesses, and particularly those with more than one owner. By contrast, Limited Liability Partnerships, or LLPs, are the organizational structure most frequently chosen by professional businesses such as law firms or medical practices. There are good reasons for each. If you are a small business wondering about the advantages of a Limited Liability Company over a Limited Liability Partnership, the law firm of Erik B. Jensen & Associates is happy to explain.

Limited Liability Companies have several significant advantages, including the flexibility of having as many members to manage their business as they like. They can avoid most of the state mandated management reporting requirements that corporations are subjected to. Most importantly these entities are not subject to taxation. Rather than paying taxes on their own, their profits and losses are passed to their members, and reported on those individuals’ personal income tax returns. This means that if the business suffers a loss, the company’s members can receive a tax break, and if they earn a profit then the members are only taxed on their gains once rather than having to face a double tax as is true of the owners of corporations. Perhaps most importantly, the owners of Limited Liability Companies do not have any personal liability for any damages caused by the firm. They are protected.

By contrast, when a business is organized as a Limited Liability Partnership, at least one of the owners is required to be personally liable for the organization’s responsibilities. Where some partners or members may be free of responsibility, as a whole the organization is not separated from its legal liabilities. There is no separation between the personal and the professional.

Limited Liability Companies have more robust requirements in terms of their reporting responsibilities when it comes to the IRS – because they do not exist as tax-filing entities as far as the agency is concerned, they are required to prepare and submit a Form 1065 as a check against their members’ individual tax returns.  But beyond that, they are able to organize their internal structure in whatever way they see fit. They get many of the benefits of corporations.

Determining what organizational structure is most appropriate for your business can be a challenge, but the attorneys from Erik B. Jensen & Associates can help. Contact us today to set up a convenient time to meet and discuss what is best for you.