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What's the Difference Between an LLC and an LLP?

When parties form a partnership or company, there are several things to consider. Perhaps most importantly is how the business will be structured in relation to taxes and liability protection regarding potential future debts. It will need to be decided whether the arrangement will be formed as a limited liability company (LLC), or a limited liability partnership (LLP).

An LLC is a business structure in which its members have a limited personal liability for the company’s actions and debts, which means their accountability is restricted to their financial investment in the company. Certain aspects of LLCs are flexible and are similar to a partnership, as LLC members are given the right to actively participate in the management of the LLC unless the operating agreement indicates it is to be managed by a manager(s). One significant benefit of an LLC is that it is entitled to pass-through taxation, meaning it is not directly taxed, with the burden passed on to its members. The company pays profits made to its members as income, with each member paying taxes on their share of the profits. Conversely, if the company took a loss for a year, each member would deduct their portion of the loss from their personal tax return.

An LLP is a form of ownership under which partners are granted limited liability protection, and all partners are able to actively manage the businesses’ day-to-day affairs. Additionally, partners can decide how the organization will be structured, as well as how losses and profits will be disseminated. An LLP is not required to pay income tax, but must pay an annual tax of $800. However, in California, only people who are licensed to practice public accountancy, law, or architecture are able to form an LLP.

In any business arrangement, disputes are bound to arise. However, if sound legal advice is not sought in a timely fashion, a dispute can destroy a business. If you are involved in an LLP or LLC dispute, contact The Matthews Law Firm, Inc. Los Angeles business dispute lawyer Art Matthews can help you understand the legal resolution available to you, and explain the advantages and disadvantages of them. To have your business dispute resolved, call 800-449-4850.

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