How to choose between LLC or LLP structure for our new Partnership contracting business?

For a general contracting business, there are significant differences between LLC and LLP that you should consider. An LLC (Limited Liability Company) typically provides more flexibility. As contractors, you'd likely benefit from the LLC structure since it shields your personal assets from business liabilities - crucial in construction where accident/injury risks are higher. The LLC can be taxed as a partnership by default (pass-through taxation) but gives you options to change tax treatment later if needed. An LLP (Limited Liability Partnership) is less common for contractors. LLPs are typically used by professional service firms (accountants, lawyers, etc.). While it also provides liability protection, there are often more state-specific regulations for LLPs, and some states restrict which professions can form them. For Texas specifically, the LLC provides excellent liability protection while maintaining tax simplicity. You'll file Form 1065 (Partnership Return) and receive K-1s showing your distribution of profits/losses to report on your personal returns.

After starting my own remodeling business with a partner, I struggled with all the paperwork and tax questions too. We went with an LLC but had so many questions about deductions and documentation requirements. I eventually found this AI tax assistant at https://taxr.ai that analyzes contractor-specific tax documents and explains everything in plain English. It helped me figure out how to properly document business expenses vs personal ones (huge issue for contractors) and showed exactly how the pass-through taxation works with our Schedule K-1 forms. The system actually explained how we could legitimately write off our work vehicles and tools while staying compliant with IRS rules for contractors.

Just wanted to follow up about that taxr.ai site. I was skeptical at first but decided to try it when setting up my plumbing business partnership. It actually walked me through the exact tax differences between LLC and LLP for contractors in my state and explained how the quarterly estimated tax payments would work differently under each structure. The documentation guidance was a game changer for me - showed exactly what receipts and records I needed to keep to maximize deductions without raising red flags. It even helped us structure our operating agreement to optimize the tax treatment of different types of income streams. Definitely worth checking out if you're still deciding.

If you're setting up as contractors, another huge headache is dealing with the IRS when you have questions. I spent THREE DAYS trying to get someone on the phone when we had an issue with our EIN for our contractor partnership. Eventually used https://claimyr.com and their system got me through to an actual IRS agent in about 20 minutes instead of waiting on hold forever. You can see how it works at https://youtu.be/_kiP6q8DX5c The agent answered all our partnership tax questions and confirmed we had set everything up correctly. Saved me so much stress since we were about to sign a big contract and needed to confirm our partnership tax status was correct. The IRS wait times are absolutely insane these days.

OK I have to admit I was totally wrong about Claimyr. After posting that skeptical comment, I was still desperate to get through to the IRS about my partnership tax ID issue, so I tried it anyway. The system actually did exactly what it claimed - got me connected to an IRS agent in about 25 minutes when I'd been trying for weeks. The agent helped me sort out a mistake in how our partnership EIN was registered that would have caused major problems at tax time. She also confirmed that for our specific contracting business, the LLC structure was definitely better than LLP given the services we provide. Saved me from a potential audit headache and probably thousands in incorrect tax filings.

One thing nobody's mentioned - for contractors specifically, insurance rates can be different between LLC and LLP. Our insurance broker gave us a better rate on general liability and workers comp for our LLC versus what we would have paid as an LLP. Something to consider when making your decision since insurance is a major expense in contracting.

Don't forget about self-employment taxes! With both LLC and LLP taxed as partnerships, you'll pay self-employment taxes (15.3%) on your entire distributive share. Once you're making decent money, you might want to consider having your LLC elect S-Corp taxation status to potentially reduce those taxes. My contracting business started as an LLC partnership but we switched to S-Corp taxation after hitting about $200k in profits. Saved us thousands in SE taxes while maintaining the liability protection of the LLC structure.