Choice of Entity Series Part 4: LLP and LLC

Limited Liability Partnership:

  • Operates similarly to a General Partnership, except limited liability partners are insulated from most of the partnership’s liability.
  • Unless the Limited Liability Partnership opts for S Class Corporate tax status, the partnership will experience similar tax consequences that concern General Partnerships.
  • Bottom Line: A Limited Liability Partnership contains much less risk than a General Partnership because limited liability partner may be held liable for personal negligence, omissions, malpractice or misconduct, but not for those actions of other partners.

Limited Liability Company:

  • Like the corporate form, members’ liability is limited to the extent of their contributions.
  • The benefit of limited liability is illusory if the Limited Liability Company intends to borrow funds or execute a lease where the lender requires a member to personally guarantee the transaction or lease.
  • If the LLC elects for S Corporation tax status, the amount of deductible losses is limited by statute to the shareholder’s aggregate basis in stock in addition to any debt owed by the Corporation to the shareholder.
  • Limited Liability Companies may deduct a “reasonable compensation” to shareholders/employees from their income for tax purposes.
  • Shareholders receiving cash distributions from S corporations are taxed on the income of the entity as it is earned, even if it is not distributed.
  • Bottom Line: Limited Liability Company formation combines the limited liability of Corporations with the treatment of partnerships for federal income tax purposes.

This checklist is not intended to be legal or tax advice.  Formeller & Formeller LLP’s Chicago startup attorneys have helped numerous clients form their businesses.  Our skilled Chicago attorneys can help counsel you on entity choice, filing proper documents with the state, and drafting partnership agreements.  Please contact our law firm today for a free legal consultation if you would like to discuss a new business venture or business ownership.

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