Choosing a corporate structure is one of the first decisions you’ll have to make when starting a new business, and also one of the most important. Whether you decide to operate as a sole proprietor, establish an LLC, or found a corporation will impact everything from your personal income taxes to your financial liability for business debts. LLCs and LLPs are two of the most popular choices, but there are crucial differences you should be aware of before deciding.

The Difference Between LLCs & LLPs

What Is an LLC?

An LLC or Limited Liability Company is a business form that can be established by one or more entities, including individuals, corporations, or other LLCs. By combining the income tax benefits of a partnership with the liability protections of a corporation, an LLC offers an attractive option for most small business owners. Members of an LLC generally can’t be held responsible for business debts or other liabilities, which provides valuable peace of mind to entrepreneurs. Forming an LLC also gives you the option to choose whether your company is taxed as an S or C corporation, whether revenue is treated as pass-through income, and how the day-to-day operations are run. For instance, the individual members may decide to manage the company directly, or you may hire an administrator to run the business for you.

Understanding LLPs

Limited Liability Partnerships or LLPs provide some similar advantages to LLCs, but with more restrictions. One important distinction is that the entity is treated as pass-through for income tax purposes, potentially increasing your tax burden. Many states, such as Ohio, require partners to manage the business directly, according to the guidelines in the partnership agreement. LLP partners also have more limited liability protections than LLC members enjoy. Much like corporate shareholders, their liability is limited to the amount of their investment in the company. Many states require professionals such as doctors, accountants, and architects to register as LLPs rather than LLCs.

The success of your new venture could depend on the decisions you make at the start, so talk to a skilled attorney before filing for paperwork. Lance S. Cox Attorney at Law has been advising business owners throughout the Cincinnati, OH, area for over 30 years, helping launch new companies, minimize income taxes, and set entrepreneurs up for success. Visit their website for more on their business law services, or call (513) 528-6000 to speak with a lawyer and schedule a consultation.