Financing LLCs and LLPs

A limited liability company is a relatively new form of business entity that is now permitted in all states.

The LLC is a hybrid between a corporation and a partnership that offers the best of both worlds for some businesses. As with a corporation, the entity can only be created via compliance with state law formalities. The members enjoy limited personal liability for the entity's liabilities. As with a partnership, the members benefit from pass-through (individual) tax treatment; that is, there's no taxation of the business itself, but all income, deductions, credits etc., "pass through" to the individual members and are reported by them on their individual returns.

The features of limited personal liability and partnership tax treatment have made LLCs a very popular form of business entity. The disadvantages of an LLC are the statutory formalities that must be followed and the expenses that accompany compliance with those formalities, as well as several unresolved legal and tax issues (e.g., multistate transactions, whether single-member LLCs are allowed, and conflicts between state LLC laws).

Limited liability partnerships (LLPs). A limited liability partnership is similar to an LLC in that the LLP permits limited liability for partners and partnership tax treatment; however, unlike an LLC, the LLP is often available only for certain occupations (e.g., professional groups such as attorneys or physicians.)  An LLP is formed by a simple registration that indicates that the partnership elects to be treated as an LLP. General partnership law, except as to partner's personal liability for business liabilities, governs the entity. If a partnership can qualify as an LLP, there are few disadvantages to registering as an LLP.

For financing purposes, the limited liability feature of LLCs and LLPs is attractive to investors who might balk at investing in a risky general partnership. Yet unlike a limited partnership, the participants in an LLC and LLP can be actively involved in management of the business.


Work Smart

The LLC is fast becoming one of the most popular entity forms for small businesses because it can be operated with the simplicity and the tax benefits of a partnership, yet it provides limited liability to the members. Make sure to consider this type of entity if you have several owners who will all participate in the management of the business.

For more information on the advantages of limited liability companies, see our discussion of establishing LLCs.