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LLC Versus LLPCalifornia offers businesses in the state a host of different entity options. Some are better than others. In this article, we take a look at the LLC versus LLP question. What is an LLC? It is a limited liability company. The entity is touted as a great choice for small businesses in that it provides the lawsuit and debt protection found with a corporation, but without the administrative requirements of that entity. From a tax perspective, it is also favored in that it can be taxed as a partnership, which overcomes the double taxation issue that can arise with corporations. It should be noted that single owner LLCs face other tax issues that are beyond the scope of this article. The LLP is yet another business entity in California. It is an offshoot of the popular LP, which stands for limited partnership. The LLP adds another “L” and stands for limited liability partnership. It is an entity that is favored by groups of professionals who prefer to work together. They do this by forming an LLP for their practice area. They may be lawyers, architects, or accountants. The LLP is unique because it allows each limited partner to isolate their exposure to a negligence claim. Put in simple terms, they are only liable for their own negligence and those they control. If three lawyers form an LLP and one commits malpractice, the other two cannot be held liable for any judgment. If I am one of the lawyers and my paralegal makes a negligent mistake, then I can be held responsible although the other two lawyers cannot. So, how do things stack up when we put the LLC versus the LLP? They don’t. These are two distinct business entities. The California LLP is only available to certain restricted groups such as lawyers, architects, accountants and so on. In turn, these professionals are prohibited from using the LLC as their business entity. So, why did I write this article? The answer is primarily that keep being asked this question and see it in forums as well. It represents a keen misunderstanding of the law, at least in California. If you are trying to determine whether you should go with an LLC or an LLP, you are asking the wrong question because you don’t have a choice. By law you must be one or the other. ******************* Nothing in this article is intended to create an attorney-client relationship. Please contact me if you have any questions. |
