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What is the Difference Between a Limited Partnership and LLC?

 Posted on November 23, 2022 in Asset Protection & Wealth Preservation

Yorkville business attorney

A Limited Partnership company and LLC have similarities in operation, but they are quite different from each other. They are the two most common business entities in the US. 

For example, when it comes to taxation, LPs and LLCs have the freedom to incur pass-through taxation treatment. This means that each member (LLC) or partner (LP) is taxed on the personal profit gained from the company. LPs and LLCs are both exempt from federal income tax.

Also, LPs and LLCs have similarities in defining the rights and roles of partners and members. This is in the aspect of Limited Partnership Agreement for LP and Operating Agreement for LLC. These are two similar internal documents that contain how the company is to operate, internal agreements among members or partners, and firm rules and regulations to be followed by all members or partners.

These are just a few similarities between the two business entities, LP and LLC. In this article, we'll look at how an LLC differs from an LP.

What is Limited Partnership?

A company can emerge using the Limited Partnership entity as its business structure. It's a type of company where two or more people are regarded as "partners". It consists of a general partner and other partners are known as "limited partners". The general partner's role is to manage the company and make business decisions, while the limited partners have little or no managerial roles in the business. In most cases, limited partners are passive investors who don't have management roles. 

In terms of limited liability, it differs from an LLC. The general partner has unlimited liability— he is to be responsible for the company's financial crises, debts, etc. The limited partners have limited liability, meaning they are not liable for any debts incurred that exceed their investment amount.

LLC members on the other hand have limited liability; meaning members are not held responsible for the company's debts. They have personal asset protection. 

Difference Between LP and LLC.

If you're looking to start a company with a group of business-minded persons like you, you can choose between these two business entities. Having said that, let's look at their differences. 

LP Vs LLC— Taxation.

In terms of taxation, LLCs and LPs are treated as partnerships by the Internal Revenue Service, but LLCs have the advantage of filing an election to be taxed as a C corporation or S corporation with the IRS. LPs are quite different in terms of taxation; their tax treatment doesn't allow an election with the IRS just like LLCs do.

LP Vs LLC— Organizational Differences.

In an LLC, the organizational structure is made up of members. Members in an LLC can choose to have their business as member-managed, where all members have managerial roles and make decisions together, or a manager-manged LLC where a manager is elected. Members of an LLC could be a group of persons, a corporation, LPs, or other LLCs. 

On the other side, an LP is made up of a general partner and limited partners. The general partner is responsible for business management, while the limited partners have no position in the business. In other words, limited partners are usually passive investors who are the main advantage of a limited partnership. They only share in business profits and losses.

Also, both business structures have different documents that contain almost the same content; i.e, the rights, interests, and responsibilities of each member or partner. They are the Operating Agreement (for LLC) and the Limited Partnership Agreement (for LP). 

Furthermore, LP and LLC have different registration procedures, which vary by state. You may want to consult a business attorney on this.

LP Vs LLC— Limited Liability Differences.

Both businesses provide limited liability, but they both differ in how it is granted to partners(LP) or members (LLC). In an LLC, members, regardless of the type and the management structure chosen have limited liability. 

In contrast, the general partner, who is only the role-player in the business has unlimited liability— meaning he/she is held responsible for liabilities incurred by the business.  The limited partners who don't have management roles enjoy limited liability. 

However, if the business is organized as a general partnership, all partners can be held accountable for debts and other liabilities.

One common, but effective way LP companies avoid unlimited liability is by creating a separate LLC to serve as a general partner. 

Which is Better— LP or LLC?

With the difference between both business entities discussed above, you may wonder which is best when you want to start your company. 

For an LP, it would be best if:

  • An LLC is established separately to serve as general partner.

  • You need passive investors that will be limited partners and have no management roles

Alternatively, an LLC might be your preferred business structure if:

  • You and your members want to enjoy limited liability

  • Enjoy pass-through taxation to avoid double taxation

  • You want to create a management team with other members

  • You want to be taxed as a corporation.

Most of the time an LLC is usually the preferred option for many emerging businesses. 

Is an attorney required?

A business attorney is not required, but mostly recommended when you feel confused about the whole process of setting up either an LLC or an LP. Attorney Sean Robertson and his team of lawyers at Gateville Law Firm in Yorkville, IL are most recommended to guide you through the seemingly confusing process of setting up either or both of business structures with ease. 

Contact Gateville Law Firm today on 630-780-1034 or via online form.

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