Scenario:
You and a sibling are exploring forming an online financial consulting firm, focusing on
millennials, which will not have a brick and mortar location. This will allow you to work, but still
indulge your desire to travel. Both of you are married. You have 1 young child. Your sibling has a
child in college studying to be a CFP.
Please answer the following question:
What type of business entity do you think would best suit your needs and why?
I am indecisive between my top business entity choices for our online financial consulting,
which are Limited Liability Partnership or Limited Liability Company. Personal liability protection
is afforded to all members of an LLC and partners of an LLP. Contrastingly, an LLP provide
protection from other partners’ negligence and malpractice. LLPs and LLCs have similarly
favorable taxation as pass-through entities. Whereas an LLC has more taxation flexibility, so we
can elect a different tax status, if beneficial. Though an LLC does risk double taxation if elect a
corporation status. A distinct difference between the two entities is a Limited Liability
Partnership is generally formed by licensed professionals, and individual partners can insulate
themselves from other partners’ actions. This would seem ideal considering that we are CPFs
attempting to establish an online financial consulting firm. An LLP has also flexibility in
structuring ownership interests, but eligibility to be a partner is restricted to the profession. An
LLC can have multiple classes of ownership, and members may be individuals, corporations,
trusts, other LLCs, and other entities. Restrictions on the transferability of ownership can be
disadvantageous to an LLC. However, it can be clarified through an operating agreement.
Overall, greater flexibility in taxation, ownership and management may make a Limited Liability
Company best suited for our online financial consulting firm.
LLC have more taxation flexibility
Limited Liability Company
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Allow for more business growth
All members have limited liability
We can elect to be taxed as a partnership, so double taxation is avoided.
Number of members is unlimited but a single member LLC is typically a disregarded
entity for tax purposes (File Form 1040 Schedule C).
Members may be individuals, corporations, trusts, other LLCs, and other entities.
Income is passed through to members, usually on Schedule K-1
Members can participate in managing the LLC.
Distributions to members do not have to be directly proportional to the members’
ownership interests as they do for S corporations.
Can have multiple classes of ownership.
Restrictions on the transferability of ownership can be disadvantageous to an LLC.
However, it can be clarified through an operating agreement.
Limited liability Partnership
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The limited liability partnership is generally one comprised of licensed professionals
such as accountants, attorneys, and doctors who practice together. The partners may
enjoy liability protection from the acts of their other partners, but each partner remains
personally liable for their own acts with respect to malpractice.
Favorable pass-through partnership taxation status available.
Flexibility in structuring ownership interests.
Partners can insulate themselves from the acts of other partners.