Many small business owners, to avoid the unlimited liability of sole proprietorships and double taxation of corporations, choose to structure their businesses at Limited Liability Partnerships or Limited Liability Companies. These entities provide many of the protections from liability without being taxed as separate entities.
Limited Liability Partnership (LLP) vs. Limited Liability Company (LLC)
An LLP generally has two or more owners who usually participate in its management and operations. These owners are called partners. LLPs are usually businesses that provide professional services where error or negligence can have great costs.
LLCs can be owned by a sole owner or, like a partnership, by multiple individuals. Owners of an LLC are called members and their involvement in the business' management and operations can vary.
As of 2010, LLPs must pay an annual registration fee of $100 for each partner primarily residing in the state of Florida with the total not to exceed $10,000. The partnership's name must contain either "Registered Limited Liability Partnership" or "LLP" at the end.
A new LLC must pay a registration fee of $125 to the Florida Department of State. LLCs must also pay an annual fee of $138.75.
Both LLPs and LLCs are considered "pass-through entities" and not taxed as separate entities.
For LLPs, the IRS divides the partnership's profit among the partners' individual "distributive shares," which are determined either by their ownership stake in the LLP or by a written agreement. Partners are required to pay income tax on the profit allocated to their distributive share regardless of whether they actually withdraw those profits from the business.
LLCs with multiple owners are taxed as partnerships while those with a single owner are treated as sole proprietorships.
Again, all profits are taxed regardless of whether they are withdrawn from the business.
Florida requires that all LLPs carry insurance to cover negligence, errors, malpractice, and other wrongful acts for which partners' personal liability is limited. The insurance must cover a minimum of $100,000 per partner up to a maximum of $3 million.
Protection from Liability
Partners in an LLP are not individually liable for the obligations or liabilities of the partnership arising from "errors, omissions, negligence, malpractice, or wrongful acts" committed by anyone else in the partnership. Partners however, are liable for any debt or obligation of the partnership whose cause was not mentioned above. In an LLP, partners are also personally liable for any malpractice, negligence, omissions, errors, or wrongful acts they commit or that are committed under their direct supervision.
Members in an LLC are not personally liable for any of the business' liabilities. Creditors cannot seize personal assets to satisfy the business' debt. Members however, are liable if they personally injure someone, personally guarantee a loan or contract, intentionally engages in an illegal activity that damages the business, do not deposit taxes withheld from wages, or treat the business as an extension of themselves.