Final answer:
LLCs and LLPs combine the limited liability protection of corporations with the pass-through taxation of partnerships. Owners are protected from personal losses beyond their investment in the company, and profits are taxed at a personal level, avoiding corporate taxes.
Step-by-step explanation:
LLCs (Limited Liability Companies) and LLPs (Limited Liability Partnerships) have limited liability protection like corporations but are taxed like partnerships. LLCs and LLPs provide a structure where the owners have limited liability, meaning they are protected from personal losses beyond their investment in the company. Should the company face bankruptcy or lawsuits, the personal assets of the owners, such as their home or personal bank accounts, are shielded.
A corporation has a similar protection for its owners, treating the company as a separate legal entity, but differs in that it is taxed separately from its owners, potentially leading to double taxation — once on the corporation's income, and again on the shareholders' dividends. By contrast, the LLC and LLP structures avoid this by allowing the company's profits to pass directly to the owners' personal income tax returns, a concept known as 'pass-through' taxation.
Each partner in an LLP or member of an LLC reports their share of the profits on their individual tax returns, and thus the company itself does not pay taxes. This is beneficial for business owners who wish to raise capital by contributing more assets and sharing the income without imposing additional corporate tax burdens.