Setting Up an LLC vs. LP
When people start a new business, they need to consider how the business will be structured. Two of the most common choices for small businesses are LLC and LP. It can be difficult for an individual to decide which of these structures is most beneficial to their specific needs.
At Froerer & Miles, our lawyers offer a wide range of legal services to small business owners. Our small business litigation services include initial business startup assistance. We can help our Ogden, UT and Layton, UT, clients consider the differences between setting up an LLC vs. an LP, and recommend the business structure that will work best for their entity.
What Is an LLC?
LLC stands for limited liability company. The LLC structure is very flexible, and combines many of the key benefits of other business structures, including corporations, partnerships, and sole proprietorships, which makes it a good option for many small business owners.
Each owner, or member, of an LLC has limited liability, similar to a corporation stockholder. This means that LLC members cannot be held personally accountable for the debts of the business. But the LLC structure is more flexible than that of a corporation. It maintains no limit on how many members can share ownership, and has none of the formal requirements of a corporation, such as producing annual reports or holding director meetings.
The LLC structure offers many other benefits afforded to partnerships and sole proprietorships. An LLC can distribute profits as they choose, without regard for an individual member’s capital contribution. And the LLC structure allows for pass-through taxable income and losses. This means there is no taxation on the business itself. Instead, income or losses “pass through” to the individual members, who are then taxed based on their own profits or losses.
What Is an LP?
LP stands for limited partnership. An LP has one or more general partners, along with one or more limited partners. General partners are similar to corporation owners, they participate directly in management and are completely liable for any partnership obligations.
Limited partners are more like investors. They cannot participate in the management of the business, and they are not responsible for any partnership obligations. Limited partners are able to receive a share of the company’s profits while protecting themselves from personal debt liability. Because of its setup, the LP structure can make it easier to find investors.
As with an LLC, an LP offers many tax benefits, including pass through taxable income and loss, which means there is no taxation on the business itself. LPs can also provide general partners (and, in some cases, limited partners) numerous tax deductions, including health insurance, pension plans, and 401k expenses.
Which Is Right for My Business?
The LLC structure and LP structure each offer their own unique benefits. Determining the right structure for a business is dependent on many factors, including business and operational objectives, jurisdictional obligations, and taxation preferences. Our small business lawyers can recommend the best structure for a business after meeting with our clients to discuss the details of their entity.
If you are starting a small business, the lawyers at Froerer & Miles can assist you with business setup, document preparation and filing, adoption of bylaws and shareholder resolutions, and more. To learn about our small business litigation services, send us a message online at your earliest convenience or call (801) 621-2690.