LLC or LLP?

THERE IS A WIDE VARIETY OF LEGAL STRUCTURES to choose from when deciding how to organize and operate a business or professional practice. Most of us are familiar with corporations and general partnerships. In recent years, the limited liability partnership (“LLP”) and limited liability company (“LLC”) have joined the array of choices. Since the substantial revision of New Jersey’s partnership law in 2000, the characteristics of LLPs and LLCs seemed to have converged somewhat. In fact, they are virtually identical with respect to federal income taxation, liability shield, and creation and post-creation formalities.

Both LLCs (with two or more owners) and LLPs are regarded as “flow-through” (a.k.a. “pass-through”) entities for federal income tax purposes. As such, the entities do not pay federal income tax— the profits and losses flow through the entity to their owners who pay individual income tax on their share of the profits.

Both LLPs and LLCs serve to shield their owners from personal liability for liabilities, debts and obligations arising in the normal course of the entity’s business.

Both LLPs and LLCs are formed by filing formation documents with the appropriate state office and must complete annual report filings to maintain their legal existence.

So, is there any significant difference between LLPs and LLCs? Yes.

• An LLP is, by its very definition, a partnership and, therefore, must have at least two owners (i.e., partners). Thus, a sole proprietor or solo practitioner cannot avail herself of the LLP form of business. An LLC may be formed and used by a single owner (i.e., member).


• LLPs and LLCs are governed by different laws. These laws establish “default rules” that will govern their respective internal affairs (e.g., management control, profit and loss allocation and distribution, an owner’s ability to withdraw from the entity, etc.). The default rules can differ significantly, but each law permits owners to change default rules by agreement—a “Partnership Agreement” in the case of an LLP and an “Operating Agreement” in the case of an LLC.


• Partnerships have been around for a long time and partnership law is well developed. As a result, sometimes regulators, bankers, investors, employees, customers and vendors are more familiar with LLPs than they are with LLCs. Although regulators, bankers, investors, customers and vendors are becoming more and more familiar with LLCs, the exact nature of LLCs still seems to elude some people. Furthermore, limited liability company law is not well developed. In addition, limited liability company law can vary significantly from state to state. Some would agree that the “newness” of LLCs as well as the absence of, and dissimilarity in, LLC law results in a degree of legal uncertainty and, therefore, risk.

So, which is best? No one form of business is the best choice for every business or profession. The facts and circumstances of each case, as well as the advantages and disadvantages of all available legal structures, should be closely examined and carefully considered. The entrepreneur should seek competent advice from legal, tax and insurance professionals before deciding how to structure his or her business or profession. Please contact the author if you wish to discuss this article or his practice areas.

This article is provided solely for the general interest of the reader. The article and its contents are neither intended as, nor should be construed as, legal advice or opinion. Legal advice and opinion are provided by the firm only upon engagement with respect to specific factual situations.

Barry F. Gartenberg, L.L.C.
Attorney at Law
505 Morris Avenue, 1st Floor
Springfield, New Jersey 07081
973-921-0600
www.bgartenberg.com
bfg@bgartenberg.com