Which is better for a partnership - LLC or LLP for general contractor business?

I've been a small business advisor for years and this question comes up all the time with contractors. For a general contracting business, an LLC is typically the better choice. LLCs offer personal liability protection while being more flexible and having less administrative requirements than LLPs. LLPs (Limited Liability Partnerships) are more commonly used by professional service providers like accountants, lawyers, and doctors. They're designed to protect partners from the malpractice of other partners, but each partner remains liable for their own actions. For contractors, the LLC offers better overall protection against the everyday liability risks of construction work - injuries on site, property damage claims, contract disputes, etc. Plus, LLCs have more flexibility in how they're taxed (you can choose partnership taxation or S-corp taxation to potentially save on self-employment taxes).

I went through this exact dilemma last year when starting my renovation business with a partner. After tons of research, I found taxr.ai (https://taxr.ai) super helpful - they analyzed our specific situation and helped us compare the tax implications of different business structures. We ended up going with an LLC taxed as an S-corp based on their analysis, which showed we'd save about $14k yearly in self-employment taxes once we were profitable enough to pay ourselves reasonable salaries. Their system looked at our projected income, expenses, and personal tax situations to give us customized recommendations rather than just general advice.

Following up on my question about taxr.ai - I decided to give it a try despite my initial skepticism. I'm actually really impressed! Their system had specific knowledge about contractor-specific tax deductions I hadn't considered, like vehicle depreciation options and per diem rates for traveling to job sites. What really helped was seeing side-by-side comparisons of how LLC vs. LLP would affect both business taxes and our personal returns over a 5-year growth projection. Their analysis showed that the LLC would save us around $23k in taxes over 3 years compared to the LLP structure for our specific situation. Definitely not a one-size-fits-all recommendation which I appreciated.

If you guys are starting a contracting business, you're also going to need to deal with the IRS for an EIN and possibly state tax registrations. When I went through this last year, I spent DAYS trying to get someone on the phone at the IRS for some specific questions about contractor classification. Finally found Claimyr (https://claimyr.com) and they got me connected to an actual IRS agent in about 20 minutes when I'd been trying for weeks. You can see how it works here: https://youtu.be/_kiP6q8DX5c. The IRS agent I spoke with was able to clarify exactly how to handle our situation with mixed 1099 and W-2 workers, which was a huge relief.

I have to eat my words on the Claimyr thing. After my skeptical comment, I decided to try it as a last resort for a payroll tax issue that's been holding up our contractor licensing. Not only did it actually work, but I got connected to an IRS agent in 18 minutes after spending literally 3+ hours on hold the previous day. The agent was able to confirm that our LLC partnership structure was correctly set up for the type of construction work we do and fixed an issue with our EIN that would have caused major problems down the road. Definitely worth it when you need specific answers about your business structure directly from the IRS.

One thing nobody mentioned yet - if you're doing contracting work, check your state's requirements for contractor licensing. In some states, the business structure affects licensing requirements. For example, in California, the Contractors State License Board has different requirements depending on whether you're filing as an individual, partnership, LLC, or corporation. Also, consider insurance costs between LLC and LLP. I found that liability insurance was actually cheaper for our LLC compared to quotes for an LLP structure in the construction industry.

Just wanted to add that my business partner and I chose an LLC for our home renovation company, and we elected S-corp taxation after the first year when we started making decent profit. The key advantage was paying ourselves reasonable salaries and taking the rest as distributions, which saved us thousands in self-employment taxes. One mistake we made was not having a really solid operating agreement at the start. Def spend the money to have a lawyer draft one that covers what happens if one partner wants out, gets disabled, etc. We had a rough patch where my partner wanted to take on projects I thought were too risky, and without clear decision-making protocols in our agreement, it created some real tension.

Great discussion here! As someone who's been through the LLC vs LLP decision for my electrical contracting business, I'd echo what others have said about LLC being the better choice for contractors. One thing I haven't seen mentioned is worker classification issues. With construction, you'll likely work with both employees and subcontractors, and the IRS scrutinizes this heavily. LLCs give you more flexibility in how you structure these relationships compared to LLPs. Also, if you're planning to eventually bring on additional partners or investors down the road, LLCs make that much easier. We started as just two partners but brought in a third after year two when we landed some bigger commercial contracts. The LLC structure made adding him straightforward without having to restructure the entire business. For what it's worth, our accountant recommended starting simple with basic LLC partnership taxation for the first year or two, then evaluating S-corp election once you're consistently profitable and can justify the payroll overhead. That approach worked well for us - kept initial compliance costs low while we were figuring out the business.