A Limited Liability Corporation (LLC) and a Limited Liability Partnership (LLP) are similar business entities that provide their owners with a level of protection from personal liability. Yet, these entities have vital differences related to who may form each, personal liability protection, and taxation. Owners create an LLC or an LLP by registering with a particular state.

LLC

One individual, multiple individuals, an organization, or another legal entity may form an LLC. Owners of an LLC are its members. While the most common business formations are LLCs, some states prohibit particular professions from forming one. Members must run their business per their LLC's operating agreement. That document outlines member responsibilities, the distribution of profits or losses, and daily operations.

Generally, an LLC protects its members' personal assets from liability. The members are not personally responsible for the LLC's debts. If someone sues the LLC, the members are not at risk of losing their personal property. The caveat is the members must not break the personal liability shield through poor recordkeeping or mingling private transactions with LLC transactions. Members have the option of filing the LLC's taxed as a partnership, sole proprietorship, corporation, or an S corporation.

LLP

An LLP must have at least two owners, who are known as partners. Only individuals may own an LLP. A state may limit ownership of an LLP to certain professions. The operating document for an LLP is the partnership agreement. The type of personal liability protection an LLP offers varies from state to state. Some state's rules prevent partners from being held personally liable for another partner's negligence, but partners retain personal liability for the LLP's obligations. Some states require managing partners to have unlimited personal liability while shielding non-managerial partners from personal liability. A protected partner may break the liability shield by getting involved in managerial responsibilities. Owners have to file the LLP's taxes as a partnership.

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