LLP vs LLC: The Main Differences Explained

Choosing the right business structure is one of the most important decisions you’ll make when starting or growing a company. It affects everything from how you’re taxed to how much personal liability you carry if the business faces financial trouble.

Two of the most common structures—Limited Liability Partnerships (LLPs) and Limited Liability Companies (LLCs)—offer limited personal liability and flexibility, but they’re not interchangeable.

At OTB Tax, we help business owners in every state navigate the nuances of legal entity formation and build strategies that reduce tax burdens while protecting their personal finances.

Here’s everything you need to know about LLP vs. LLC so you can make an informed decision that aligns with your goals, growth plans, and state laws.

What is a Limited Liability Partnership (LLP)?

A Limited Liability Partnership, or LLP, is a legal entity often used by licensed professionals who want to share profits, responsibilities, and liability protection while keeping flexibility in how they operate.

Common in fields like law, accounting, architecture, and medicine, LLPs are designed for professional businesses that require a formal partnership agreement and clearly defined management duties.

Unlike a general partnership, an LLP offers limited liability protection, meaning each partner is generally protected from being personally liable for the misconduct or negligence of other partners.

Pros of an LLP

• Limited personal liability: Each partner’s liability is generally limited to their investment in the business. If the LLP is sued or falls into debt, a partner’s personal assets—like their home or car—are usually protected.
• Flexibility in management: An LLP allows partners to define responsibilities and profit sharing in a written partnership agreement, giving them freedom to organize the business their way.
• Pass-through taxation: Like an LLC, an LLP typically avoids double taxation. Instead, profits and losses are passed through to the partners, who report them on their personal tax returns.
• Ideal for professional businesses: Many states limit LLPs to licensed professionals, making this structure a strong fit for attorneys, CPAs, or doctors working as business partners.

Cons of an LLP

• Not available in all states: Some states restrict LLPs to specific industries or don’t allow them at all. You’ll need to check local laws before forming one.
• Liability limits vary: While partners are protected from one another’s negligence, they may still be personally responsible for their own professional misconduct.
• More complex than a sole proprietorship: Forming an LLP involves paperwork and registration fees, and it requires a detailed partnership agreement to avoid disputes.
• Less recognition: LLPs are less commonly understood than LLCs, which could affect investor interest or customer perception in certain industries.

What is a Limited Liability Company (LLC)?

A Limited Liability Company, or LLC, is a flexible business structure that combines the liability protection of a corporation with the tax advantages and simplicity of a sole proprietorship or partnership. LLCs are one of the most popular entity types for small and midsize businesses because they offer limited personal liability and don’t require complex corporate formalities.

LLCs can be owned by one person (a single-member LLC) or multiple people (multi-member LLCs), and ownership is documented through an operating agreement.

Pros of an LLC

• Strong liability protection: LLC members are generally not personally liable for business debts or lawsuits. This helps shield your personal assets in case the business faces legal trouble.
• Flexible taxation options: By default, LLCs enjoy pass-through taxation, meaning the company’s income is only taxed once at the owner level. But LLCs can also elect to be taxed as an S corporation or C corporation for additional tax strategy options.
• Simple management: LLCs offer flexibility in how they’re managed—either by the members themselves or by appointed managers. The operating agreement defines who handles what.
• Separate legal entity: An LLC is considered a separate entity from its owners, which enhances asset protection and allows for easier record-keeping and legal compliance.

Cons of an LLC

• Self-employment taxes: In many cases, LLC members must pay self-employment taxes on business income, unless they elect a different tax classification.
• More paperwork than a sole proprietorship: While easier to maintain than a corporation, forming and maintaining an LLC still involves registration, fees, and compliance with annual reporting.
• State-specific requirements: Each state has its own rules for LLC formation, including fees, naming restrictions, and required documentation.
• Limited use in professional industries: Some states don’t allow licensed professionals to form standard LLCs—instead, they require professional limited liability companies (PLLCs) or LLPs.

Key Differences Between LLPs and LLCs

LLPs and LLCs may sound similar, but there are a few key differences you’ll want to take note of. Let’s look at five of the most important.

1. Liability Protection

Both LLPs and LLCs offer limited liability protection, but how it works differs.

In an LLP, partners are typically protected from the actions of other partners, but not always from their own malpractice. This makes it ideal for professionals who want to protect themselves from their colleagues’ mistakes but still be held accountable for their own work.

In an LLC, personal liability protection is broader. LLC members are usually not personally responsible for business debts, legal claims, or the actions of employees. As long as the LLC follows legal formalities and isn’t commingling funds, the partner’s personal assets are protected.

2. Management Structures

LLPs are inherently partnerships, meaning each partner is involved in managing the business unless the partnership agreement says otherwise. This structure assumes active roles for all partners and clear delineation of management duties.

LLCs offer more flexibility. Owners (or members) can choose to manage the business themselves or appoint outside managers. Roles and responsibilities are laid out in an operating agreement, which gives LLCs more freedom to customize how decisions are made and who handles what.

3. Formation and State Restrictions

LLCs are available in all 50 states, and anyone—regardless of profession—can form one. The process is relatively straightforward, although paperwork, fees, and renewal requirements vary by state.

LLPs, on the other hand, are not recognized in every state. Even where allowed, LLPs are often limited to licensed professionals like lawyers or accountants. If your state doesn’t permit your type of business to form an LLP, you’ll need to choose an LLC or another legal entity.

4. Taxation

Both structures benefit from pass-through taxation by default, meaning the business itself doesn’t pay income tax—the profits flow through to the owners’ individual returns.

However, LLCs offer more tax strategy flexibility. You can elect to be taxed as an S corp to potentially lower your self-employment taxes, or as a C corp if you want to retain earnings in the business or attract investors.

LLPs don’t have this flexibility. All partners report income and typically pay self-employment taxes on their share of earnings.

5. Compliance Requirements

LLCs generally have fewer restrictions on who can be an owner, and many states have simple annual filing and renewal processes. LLCs must keep up with internal documentation, including an operating agreement, but don’t require formal board meetings or minutes like corporations do.

LLPs usually have to file written partnership agreements, register with the appropriate state board (especially for licensed professions), and follow specific rules for professional conduct. Compliance can be more complicated, especially in regulated industries.

How to Choose The Right Business Structure

Consider The Business Type (Professional vs. General)

If you’re forming a business with other licensed professionals—such as attorneys, CPAs, or medical providers—an LLP may be required in your state. It’s built to handle shared ownership among professionals while offering mutual liability protection.

If your business doesn’t involve licensed professions, an LLC is likely the better fit. It offers more flexibility in ownership and management, and it’s widely accepted across industries.

Think About Future Growth and Tax Strategy

Planning to bring on investors, reinvest profits, or limit your self-employment taxes? An LLC gives you more room to adapt over time. With options to change your tax classification and scale operations, LLCs provide strategic benefits that grow with your business.

On the other hand, LLPs are generally not designed for rapid growth or outside investment. They’re best suited to small professional partnerships that plan to stay relatively lean.

Evaluate State Laws and Availability

Before making any decisions, research your state’s requirements. Some states don’t allow LLPs for certain industries, or at all. Others may require a separate entity like a PLLC for professional services.

Understanding your state’s laws will help ensure that you choose a structure that’s both legally compliant and strategically sound.

Should You Start an LLP or LLC?

Choosing between an LLP vs. LLC comes down to your business’s structure, goals, and professional requirements. Both options offer limited liability and protect the members’ personal assets, but they serve different needs. An LLP may be ideal for professionals working together under a shared license, while an LLC is typically more flexible and widely available.

At OTB Tax, we don’t just help you form your entity—we help you use it strategically to lower your taxable income, protect your personal finances, and support long-term growth. Whether you’re just starting out or considering restructuring, we’re here to help you navigate the complex tax laws and make decisions that fit your unique financial circumstances.

Need help deciding between an LLP or LLC? Schedule a consultation today and get expert advice tailored to your business.