Comparison of LLP's and LLC's in New York

February 28, 2013

Comparison of LLP's and LLC's in New York

Article provided by Law Offices of Kenneth T. Wasserman
Visit us at http://www.kenwasserman.com

New Yorkers know starting a new business is a huge undertaking. Limited liability partnerships and limited liability companies are two business entity types available to New York residents contemplating starting a new company. Both options provide protections similar to those of corporations, such as limited liability which protects owners from being personally responsible for the liabilities of the company beyond their contributions.

Whether a company operates as an LLP or LLC may depend on company type. For instance, insurance companies and banks are forbidden from operating as LLCs. Additionally, in New York, only lawyers, accountants, engineers and architects may operate as LLPs.

Limited Liability Partnerships

An LLP must be formed by at least two individuals. Two advantages to forming an LLP are the easier paperwork procedures and the ability to "pass through" taxation. In contrast to an LLC, no articles of organization are required. However, a Certificate of Registration must be filed. In pass through taxation, each partner reports an equal share of profits on their personal income taxes. This way the LLP itself avoids paying federal taxes on profits.

LLP's are created to enable individuals to work together through the contribution of labor, skill and capital to the company. Management is divided between the partners, with each partner possessing equal power to make company decisions.

One disadvantage to an LLP in New York is partners are not protected from company debts such as business loans. However, partners are protected against the debts of another partner.

Additionally, if one partner leaves the LLP, the partnership is labeled dissolved. An LLP is also considered dissolved if extra earnings or capital is transferred to another member or sold to a new member.

Limited Liability Companies

The number of individuals who may form an LLC is unlimited. An LLC may even be formed by one individual. In comparison to an LLP, LLCs require the filing articles of organization. Two advantages to LLC's are organizational flexibility and overall debt and liability protection to owners.

Since LLCs are generally more flexible organizationally than LLPs, the business form embraces a wider range of business types. What makes LLCs flexible is that owners have the option of running operations themselves, similar to LLP management, or electing managers to handle day-to-day operations.

Additionally, LLCs can be taxed at the entity level or may be taxed as a pass-through entity. Any company profits higher than members' salaries are taxed at the entity level, if the owners forego pass-through taxation. Depending on the amount of profit a business makes, the entity level taxation can be beneficial for LLC owners.

A key advantage to forming an LLC in New York is that the personal assets of members are protected from lawsuits against the company and company debts, unlike an LLP. However, members of an LLC are responsible for any personally guaranteed debts.

It is important to remember that owners of both LLPs and LLCs are still liable for certain actions. These include acts of fraud or witnessing harmful actions of partners or owners against third parties.

An individual wishing to establish a limited liability entity can benefit from an experienced business law attorney. The attorney can provide detailed guidance on the type of business entity that appropriately fits your business.