The main difference between an LLC and an LLP comes down to three things: who is allowed to form one, how far the liability protection reaches, and how much flexibility you have over taxes. An LLC is open to almost any business, protects owners from essentially all business debts, and can elect to be taxed as an S corporation. An LLP is a partnership, requires at least two owners, is restricted to licensed professionals in some states, and primarily protects each partner from liability for what the other partners do.
Both give you pass-through taxation and both put a legal wall between the business and your personal assets. The wall just isn’t built the same way, and the door into each entity isn’t open to the same people.
Who Can Form Each One
This is the first filter, and for a lot of readers it ends the conversation before anything else matters.
An LLC is available to nearly any type of business. Freelancers, real estate investors, tech startups, restaurants, and consulting firms all commonly operate as LLCs. One person can form an LLC alone, though single-member LLCs carry some additional risk: courts in many states are more willing to pierce the veil when there’s only one owner, and the “charging order” protection that normally shields LLC assets from an owner’s personal creditors may not hold up. Only a handful of states have specifically amended their laws to give single-member LLCs the same creditor protection as multi-member LLCs.
An LLP always requires at least two partners because it is a form of partnership. Some states also restrict LLPs to licensed professionals such as attorneys, accountants, architects, and physicians. Oregon, for example, limits LLPs to partnerships providing professional services that require a license. Other states allow any qualifying partnership to register as an LLP. If you’re a solo founder, or you aren’t a licensed professional in a state that restricts LLPs, the LLP isn’t on the table.
How the Liability Shield Actually Works
Both entities protect personal assets, but they protect against different things.
LLC: Broad Protection Against Business Debts
An LLC creates a legal wall between the business and its owners’ personal assets. If the LLC is sued or can’t pay its debts, creditors generally cannot reach a member’s home, personal bank accounts, or other assets outside the business. This protection applies regardless of what another member did or failed to do. The main exceptions are a member’s own fraud, personal guarantees on a loan, and situations where a court decides the LLC is really just an alter ego of its owner.
That alter-ego exception trips up more small business owners than any lawsuit. Courts can “pierce the veil” of an LLC when the owner treats the business like a personal piggy bank. Typical red flags include mixing personal and business funds in the same account, failing to keep basic corporate records, and starting the business without enough capital to reasonably cover its foreseeable obligations. A separate bank account and even minimal records go a long way toward preserving the shield.
LLP: Protection Against What Your Partners Do
An LLP protects each partner from liability caused by another partner’s mistakes or misconduct. If one partner in a law firm commits malpractice, the other partners’ personal assets are generally off the table. Every partner, however, remains fully liable for their own negligence and for the actions of anyone they directly supervise.1Legal Information Institute. Limited Liability Partnership
What happens with ordinary business debts like a lease or a vendor invoice is where states split. “Full-shield” states protect partners from personal liability for all partnership obligations, whether they come from a partner’s misconduct or from a routine contract. “Partial-shield” states only protect against liability from another partner’s wrongful acts, leaving partners personally exposed to the partnership’s contractual debts. The distinction matters: in a partial-shield state, an LLP partner could be personally liable for the office lease if the partnership can’t pay. States that adopted LLP statutes more recently tend to offer full-shield protection, but you need to check your own state’s rules before relying on this.
The short version: an LLC’s shield generally covers all business debts in every state. An LLP’s shield definitely covers you against your partners’ wrongdoing, and may or may not cover you against the partnership’s contracts depending on where you form it.
Taxes
Both Default to Pass-Through
Neither entity pays federal income tax at the business level. Profits and losses flow through to each owner’s personal return and are taxed at individual rates. A multi-member LLC and an LLP both file an informational Form 1065 with the IRS. A single-member LLC is treated as a “disregarded entity” and reports its income on the owner’s Schedule C.
The Tax Election That Favors LLCs in Practice
Under the IRS “check-the-box” regulations, any eligible entity that isn’t automatically classified as a corporation can elect how it wants to be taxed by filing Form 8832.2Internal Revenue Service. About Form 8832, Entity Classification Election That technically includes both LLCs and LLPs.3eCFR. 26 CFR 301.7701-3 – Classification of Certain Business Entities
In practice, LLCs use that flexibility far more often. The common move is electing S corporation tax status, which lets the LLC keep its legal structure while changing how the IRS taxes it. LLPs rarely make corporate elections. The professionals who form them typically want partnership tax treatment, and if they wanted corporate taxation, they’d form a professional corporation instead.
Self-Employment Tax
This is where the tax choice gets expensive. LLC members and LLP partners who actively participate in the business owe self-employment tax of 15.3% on their share of business income, covering Social Security (12.4%) and Medicare (2.9%).4Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes) The Social Security portion applies only up to a yearly wage base; the Medicare portion has no cap.5Social Security Administration. Contribution and Benefit Base
An LLC that elects S corporation tax status can reduce this burden. The owner pays themselves a reasonable salary, and payroll taxes apply only to that salary. Remaining profits distributed to the owner are not subject to self-employment tax. For an LLC netting $150,000, the S corporation election could save roughly $10,000 per year in self-employment tax, though $2,000 to $4,500 in added compliance costs for payroll processing and a separate corporate return eat into those savings. The IRS watches this closely and requires the salary to be reasonable for the owner’s role and industry.
LLP partners face a similar calculation. General partners owe SE tax on their entire distributive share of partnership income plus any guaranteed payments. Partners who qualify as limited partners owe SE tax only on guaranteed payments for services, not on their distributive share.6Internal Revenue Service. Entities 1 Whether an LLP partner counts as a “limited partner” for SE tax purposes has been a murky area of tax law for years, and the IRS has never issued final regulations settling the question. Worth a conversation with a tax professional before you rely on it.
Management
LLCs offer two management models. In a member-managed LLC, every owner has a hand in daily decisions. In a manager-managed LLC, the owners appoint one or more managers who may or may not be members themselves. That second option is useful when some owners are passive investors or when the business wants professional management without giving up ownership.
LLPs default to the traditional partnership model: all partners participate in managing the business and share decision-making authority. A well-drafted partnership agreement can assign specific responsibilities, create committees, or give managing partners more day-to-day authority, but there’s no built-in way to separate ownership from management the way a manager-managed LLC can.
Both structures lean heavily on their internal governing documents. An LLC’s operating agreement and an LLP’s partnership agreement set the rules for voting, profit-sharing, adding or removing owners, and what happens if someone wants to leave. Even in states that don’t legally require these documents, operating without one means the state’s default rules fill every gap, and those defaults rarely match what the owners actually intended.
Formation and Keeping the Entity Alive
Forming an LLC requires filing articles of organization with your state’s Secretary of State or equivalent agency.7Legal Information Institute. Articles of Organization Forming an LLP typically means filing a certificate or statement of limited liability partnership with the state. Initial filing fees for both generally run from about $50 to several hundred dollars.
After formation, draft the internal governing document right away. Skipping that step means the state’s default rules govern the relationship, and those defaults can produce results nobody intended.
Most states require LLCs to file an annual or biennial report and pay a maintenance fee. These range from nothing in states like Ohio and Missouri to over $800 in California once franchise taxes are included. Missing the deadline can trigger administrative dissolution, which strips away your liability protection and can make it hard to enforce contracts or access bank accounts. LLPs often face a similar renewal requirement, and the consequences of letting it lapse are the same: the partnership loses its limited liability status, and every partner is suddenly exposed to the full range of partnership liabilities.
Which One Should You Pick
For most businesses, the LLC is the more versatile choice. It’s available in every state regardless of industry, works for a single owner, offers flexible management, and provides the broadest liability shield. The ability to elect S corporation tax status makes it especially attractive for profitable service businesses.
The LLP makes the most sense for professional partnerships where the partners want to practice together but don’t want to be on the hook for each other’s malpractice. Law firms and accounting practices are the classic examples. The partnership tax structure and shared management model fit how those businesses actually operate.
A few practical factors that often decide it:
- Solo founder: an LLP isn’t an option. You need at least two partners.
- Passive investors: a manager-managed LLC lets some owners step back from operations; LLPs assume active participation.
- Tax savings priority: the S corporation election available to LLCs can save thousands a year for owners earning above roughly $60,000 to $70,000 in net income; LLPs rarely make this election.
- Professional licensing: if your state restricts LLPs to licensed professionals and your firm qualifies, the LLP structure fits how professional practices work.
- Liability concerns: if protection from a co-owner’s negligence is the main worry, both structures address it, but an LLC generally provides broader coverage because it also protects against the entity’s contractual debts in every state.
State laws governing both structures vary significantly, particularly around LLP shield strength and single-member LLC protections. Before filing formation paperwork, a conversation with a business attorney familiar with your state’s rules is worth the cost, especially when a wrong choice could leave personal assets exposed.