If you’re planning to start a business with others, you have several options for the type of formal business entity structure for your new company. Two very different options are a limited liability company (LLC) and a limited partnership (LP). It’s important to consider a number of factors when evaluating a limited partnership vs LLC, the most important being the level of personal liability protection you and your partners will have.
Let us help you evaluate forming an LP vs LLC, so you can determine what’s best for your business.
You may be wondering, “What does an LP stand for in business?” A limited partnership is made up of two or more partners. At least one must be a general partner, and the others can be limited partners. There can be multiple of each partner type. The general partner is responsible for overseeing and running the business. The limited partner doesn’t have any management duties but provides financial backing.
Forming a limited partnership can make it easier to get funding for your business. Limited partners can invest in the business without sharing any personal liability. The liability falls to the general partners, who are essentially the boots on the ground for the company. If there are multiple general partners, they can share the management workload.
Any time there are multiple partners in a company, you run the risk of disagreements. It’s important to have all of your processes documented. But no matter how thorough you are, there might still be disputes that result in the dissolution of the business when partners just can’t see eye to eye.
General partners are personally liable for the debts of the limited partnership. If the company goes bankrupt or incurs legal debt, all of the financial responsibility is on the general partners. This isn’t a big disadvantage for the limited partner, but it certainly is for the general partner. If the business is sued or goes into debt, the limited partner’s potential losses are limited to what they’ve invested in the business. The general partners, though, can lose their personal assets, including their savings, home, car, etc.
The disadvantage for the limited partner is that they have little say in how the business operates.
A limited partnership is different from a limited liability partnership (LLP) in a couple of ways. The first difference between an LP and LLC is that an LP has two different types of partners with different degrees of liability. In an LLP, all members of an LLP share the same degree of liability protection and are responsible for liability incurred because of their own negligence. When evaluating a limited partnership vs LLP, it’s worth noting that LLPs are most common for professional partnerships, such as a group of dentists or accountants.
Limited liability companies are a popular type of formal business entity that protects owners from personal liability and has valuable tax benefits. It’s usually more cost-effective and easier for most business owners to form and operate than a corporation.
A limited liability company has the advantage of personal liability protection for all members. This means that the debt incurred belongs to the company and not to individuals. In most cases, an individual member’s personal assets can’t be accessed to satisfy a business debt.
LLCs also have the benefit of pass-through taxation, which means that members are only taxed one time at the personal income level. In comparison, corporation profits are taxed first at the business level and again when they’re distributed to the owners, who pay personal income tax on their share of the profits.
Some states don’t allow professional groups (those in licensed professions such as doctors, engineers, lawyers, etc.) to operate as limited liability companies. Instead, depending on the state, they might be required to form a professional limited liability company (PLLC) or a professional corporation (PC).
Although all LLCs have pass-through taxation at the federal level, when it comes to state taxes, some states will tax LLCs like a corporation. LPs will usually retain pass-through taxation at both the federal and state levels.
Many people have asked the question, “Is an LLC a limited partnership?” There are several differences to take into account when evaluating an LLC vs limited partnership.
When comparing a limited partnership vs limited liability company, an LLC doesn’t have different types of members. Each LLC should ideally have an operating agreement that details the structure of the organization. Unless otherwise stated in the operating agreement, all members have a say in how the business is managed.
A limited partnership has two different types of partners. Limited partners are not active in the operations of the business. Their involvement is limited to investing in the business and sharing the profits and losses.
One of the purposes of both LLCs and LPs is to limit the personal liability of the members and partners. These business types offer different degrees of liability protection.
The members of a limited liability company all obtain personal asset protection. In most cases, business debts or legal claims are absorbed by the business.
You may be wondering, “Does a partnership have limited liability?” In a limited partnership, only the limited partners have this type of protection. General partners don’t have protection for their personal assets.
Some states allow LPs to form a separate LLC to be the general partner of the organization. Though functional, doing this negates any effort to make the process simple and easy.
For tax purposes, the Internal Revenue Service treats limited partnerships and limited liability companies the same. However, while LLCs are taxed as partnerships with pass-through taxation by default, LLCs also have the option of being taxed as either a C corporation or an S corporation. LPs don’t have this option.
In some cases, being taxed as an S corporation allows the LLC owners (who are called “members”) to pay less in self-employment taxes. Being taxed as an S corporation also has pass-through taxation, but it also allows LLC members to earn money from the business both from its profits and by being paid a salary. In some instances, this could reduce the self-employment taxes members pay because they would pay the Social Security/Medicare portion of their taxes on their salary, but not their share of the LLC’s profits.
Being taxed as a C corporation (the default form of corporation) does mean the business’s profits will be taxed twice — once at the entity level and again at the individual business owner level. Despite this double taxation, certain LLCs may benefit from this tax structure, as it has the most possible deductions.
Knowing the difference between an LLC and LP can help you determine which structure is best for your organization. If you’re a solo business owner, you may consider learning about the difference between a sole proprietorship and an LLC.
Limited liability companies have a lot of great benefits, but one benefit that makes them so popular is that all members get personal liability protection.
If you’re ready to form your limited liability company, we can help you get up and running with our LLC Formation Service starting at $0 plus state registration fees. A lot of work goes into starting a business. We have practical tools and services to help make the process smoother.
Disclaimer: The content on this page is for informational purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
There are several differences to consider when evaluating an LLC vs LP. One of the primary differences is personal liability protection. LPs have two types of partners with differing degrees of liability. In an LLC, all members have personal liability protection.
Both LLCs and partnerships are eligible for pass-through taxation, which means the business owners are only taxed at the personal income tax level. Unlike an LP, though, LLCs also have the option to be taxed as a corporation, but that would be a strategic decision based on the specifics of the business.
An LP is a partnership that involves two or more people with differing degrees of personal liability. A corporation has shareholders rather than partners, and they all have the same type of personal asset protection. Corporations are also taxed differently than limited partnerships.
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