Are you a Denton, Texas resident and thinking about starting your own business? Whether you’re an entrepreneur or a small business owner, one of the most important decisions you’ll make is choosing the right legal structure for your company.
When it comes to legal structures, two common options you may have heard of are Limited Liability Companies (LLCs) and Limited Liability Partnerships (LLPs).
Both LLCs and LLPs offer liability protection for business owners, but there are some key differences between the two. In this four-part article, we’ll break down what those differences are, so you can make an informed decision about which legal structure is right for your business.
LLC stands for Limited Liability Company. Essentially, an LLC is a type of business entity that combines the liability protection of a corporation with the tax benefits of a partnership. As the name implies, an LLC limits the liability of its owners, who are known as members.
This means that if the company is sued or goes bankrupt, the members are not personally responsible for the company’s debts or obligations beyond their investment in the company.
LLCs are relatively easy to set up and maintain, making them a popular choice for small businesses. In Texas, LLCs are governed by the Texas Business Organizations Code (TBOC), which outlines the rules and regulations for forming and operating an LLC in the state.
One of the key benefits of an LLC is the flexibility it offers in terms of taxation.
By default, an LLC is a pass-through entity, which means that the company’s profits and losses are passed through to the members’ personal tax returns.
This can result in significant tax savings, since the company itself is not taxed on its profits. However, LLCs can also choose to be taxed as a corporation if that better suits their needs.
In terms of management, LLCs can be managed by the members themselves or by a designated manager.
This gives LLCs the flexibility to choose a management structure that works best for them. On top of that, LLCs can bring on board as many members as they want, which is awesome if you’re running a business with several owners.
So if you’re a small business owner who wants to protect your assets and have some tax wiggle room, an LLC could be the right choice for you.
Now that we’ve covered the basics of LLCs, let’s take a look at Limited Liability Partnerships, or LLPs for short.
LLPs are similar to LLCs in that they offer liability protection for their owners, who are known as partners. However, there are some key differences between the two.
One of the biggest differences is in the way that the company is managed.
Unlike LLCs, which can be managed by the members themselves or by a designated manager, LLPs must have at least one general partner who is responsible for managing the company. This general partner is personally liable for the company’s debts and obligations, which means that if the company is sued or goes bankrupt, the general partner’s personal assets are at risk.
In addition to general partners, LLPs can also have limited partners, who are not involved in the management of the company and have limited liability.
This means that limited partners are not personally responsible for the company’s debts and obligations beyond their investment in the company.
Another difference between LLCs and LLPs is in the way that they are taxed.
Like LLCs, LLPs are pass-through entities by default, which means that the company’s profits and losses are passed through to the partners’ personal tax returns. However, LLPs do have some restrictions on the types of businesses that can form them.
LLPs are also subject to different rules and regulations than LLCs. In Texas, LLPs are governed by the Texas Revised Partnership Act (TRPA), which outlines the requirements for forming and operating an LLP in the state.
So, which is better for your business – an LLC or an LLP?
Ultimately, it depends on your specific needs and circumstances. LLCs offer more flexibility in terms of management and are available to a wider range of businesses.
Both LLCs and LLPs offer liability protection for business owners, but they differ in their management structure, taxation, and regulations.
Before making a decision, it’s important to consult with a qualified attorney or accountant who can help you weigh the pros and cons of each option and determine which one is best for your business.
LLC or LLP? The Conclusion
LLCs are a type of business entity that offer liability protection and tax flexibility, and can be managed by the members themselves or a designated manager. They are available to a wide range of businesses and are governed by the Texas Business Organizations Code.
LLPs are similar to LLCs in that they offer liability protection for their owners, but have a different management structure and are subject to different regulations. They are not available to some professionals and must have at least one general partner who is personally liable for the company’s debts and obligations.
When deciding between an LLC and an LLP, it’s important to consider your specific needs and circumstances. Consulting with a qualified attorney or accountant can help you make an informed decision and ensure that you are setting your business up for success.
Starting a business can be an exciting but overwhelming process, and choosing the right legal structure is just one of the many decisions you’ll need to make. But with the right information and guidance, you can set your business up for success and achieve your entrepreneurial dreams.
Call Hunter Sargent, PLLC today to find out which structure is right for you.