United States: Choice Of Business Entity - When To Use An LLC Or An LLP

A. LLC. Generally an LLC should be considered as a possible entity of choice in any situation where limited liability and a flow-through for tax purposes for all owners are desired but otherwise unavailable. For example, because an LLC, unlike an S-corporation, (i) may have more than 75 equity holders and (ii) may have corporations, nonresident aliens, general or limited partnerships and trusts as equity holders, an LLC may be advantageous where an S-corporation or limited partnership with an S-corporation general partner is not available. The LLC may also be a viable alternative to use instead of a limited partnership in some situations where it is undesirable to have a general partner which is generally liable for all of the entity's obligations or where investors who would otherwise be limited partners desire to be involved in the management of the entity. The Texas franchise tax is an impediment to use of an LLC. Self-employment tax concerns also limit the situations where the LLC is the entity of choice.

B. LLP. An LLP is a possible entity of choice where limited contract and vicarious tort liability and tax flow through are important. The LLP is becoming the entity of choice for Texas law firms because it affords limitations on malpractice liability similar to a professional corporation or PLLC but without the franchise tax cost. The LLP is similarly desirable for other professional firms, although its applicability is not limited to professional firms, and its low cost and ease of use make it desirable for any business (including any joint venture) for which a general partnership would otherwise be the entity of choice. Because an LLP is a partnership, the LLP is not available where there is only one owner involved.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.