LLC vs Limited Partnership: What’s the Difference?

A limited liability partnership and a limited liability company (LLC) are similar because all partners are has limited liability protection. A limited partnership is managed by one or more general partners who control the day-to-day operations of the business. An LLC is managed by the managers.

By Brad Nakase, Attorney

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Table of Contents

1. What constitutes a partnership?

2. What is an LLC?

3. Reasons for Establishing a Partnership

4. Partnership Disadvantages

5. Reasons for Establishing an LLC

6. Disadvantages of Establishing an LLC

7. Which is better limited partnership or LLC?

8. Formation and Continual Obligations

9. Pass-Through Taxation

10. Management and Flexibility

What constitutes a partnership?

Let’s say you are debating getting an LLC vs. a partnership. To make such a critical decision, you should first understand the different kinds of entities available to you and your business.

A partnership is a commercial arrangement in which at least two people come together to jointly run a business as co-owners. While partners may possess varying degrees of ownership, the combined ownership percentages must always total 100 percent.

In the realm of partnerships, there are three main types: limited partnership, general partnership, and limited liability partnership. To compare an LLC vs a limited partnership, let’s take a look at what limited partnerships are.

Limited Partnership

A limited partnership comprises two categories of partners: limited partners and general partners. This entity structure can be viewed as a blend between a corporation and a general partnership, offering limited liability protection to specific partners.

In the context of a limited partnership, a minimum of one partner needs to assume the role of a general partner, bearing unlimited liability.

There must be a minimum of one limited partner, whose liability is usually restricted to the value of their investment.

In this setup, general partners bear personal responsibility for the business’ obligations, exposing them to increased liability in case of any unforeseen events. However, they generally hold the most authority in determining how the company is managed.

Individuals in the position of limited partners function more like passive shareholders in a corporation — providing investments to reach company goals but not directly participating in managerial decisions.

Hence, when considering an LLC vs limited partnership, this entity type is typically employed in specific, time-limited scenarios, like real estate and film projects, in addition to family estate planning.

If you are considering an LLC vs a limited partnership, know that when establishing a limited partnership, it is important to grasp a few key requirements:

This business framework is established according to state law. Different forms, including a limited partnership certificate, needs to be submitted to the state. The formation state can be any state.

Limited partnerships are mandated to possess a partnership agreement and need to publicly indicate their designation by including the suffix “LP” in the name of the company.

Limited Liability Partnership

When comparing an LLC vs a limited partnership, you should be aware that a limited liability partnership resembles an LLC in the sense that every partner is afforded limited liability protection. That said, in certain states, LLP partners may receive a lower level of liability protection compared to an LLC.

The requirements for an LLP vary depending on the state:

In certain states, the ability to get an LLP is restricted to specific professional services, often those necessitating a state license, like attorneys, accountants, doctors, and the like.

Similarly, an LLP might be one of the only options for specific professions creating a group practice. For instance, licensed professionals like doctors, lawyers, and architects can establish a professional corporation or LLP in California, but are unable to create an LLC.

In other states, an LLP may be utilized for any commercial purpose.

It is important to note that when looking at LLCs vs limited partnerships, the owners of a limited partnership, an LLP, or a general partnership are referred to as partners, while in an LLC, they are known as members.

An LLP needs to include an indicator of entity in its name, such as Limited Liability Partnership, L.L.P., or LLP. The same also applies to a limited partnership, an LLC, or any other legally recognized business structure where all or some owners are granted liability protection.

If you are looking at an LLC vs a limited partnership, these are a few of the requirements for establishing an LLP. (Please remember that laws may differ across states):

Documentation is necessary when making a company an LLP. These forms need to be submitted to the relevant state agency, as well as the requisite fees for filing. One of the necessary documents is occasionally referred to as a certificate of limited liability partnership or a statement of qualification.

Any state may be selected as the state of formation (provided that the state’s LLP criteria are met).

Certain states mandate at least one legal notice regarding the new LLP to be published in at least one local newspaper.

For the LLP business structure to be established, there must be at least two partners.

A general partnership in the process of conversion maintains its original partnership agreement. The LLP is controlled by both state law concerning general partnerships and the specific clauses of the partnership law pertaining to LLPs.

What is an LLC?

If you are comparing an LLC vs a limited partnership, know that a limited liability company (LLC) is a distinct legal entity separate from its members. This legal structure provides assurance that, in most cases, the owners may not be held personally liable for the business’s debts and obligations.

Moreover, an LLC offers flow-through taxation, meaning that the income earned is not subject to taxation at the structural level. However, if the LLC has more than one owner, members must still submit a tax return for it. The loss or income indicated in the return is then passed on to the respective owner(s).

Each member of an LLC must individually report the loss or income on their tax returns and fulfill the associated tax obligations and fees.

If you are considering an LLC vs a limited partenrship, take a look at a few of the prerequisites for establishing an LLC:

Submitting Articles of Organization to the Secretary of State.
Selecting a business name that meets the qualifying criteria.
Drafting an operating agreement that outlines the internal workings and management of the LLC.
Designating a registered agent who will receive legal documents on behalf of the LLC.

Reasons for Establishing a Partnership

Limited Partnership

If you are considering an LLC vs a limited partenrship, you may be interested in limited liability for limited partners. Limited partners enjoy the benefit of their personal assets being distinct from the company; they are not personally accountable for company debts. Their liability is confined to what they invested in the LP.

Note: For general partners to get limited liability, a lot of LPs employ a corporation or LLC to function as the general partner due to their limited liability.

Authority over decisions related to the business: Limited partners do not play a part in the day-to-day management. General partners control the daily operations.

1. Flow-through taxation: The business itself is not subject to income tax. Losses and profits are documented on the partners’ individual tax returns, and any applicable tax is paid at the personal level.
2. Short-term projects: Limited partnerships are primarily utilized for brief business endeavors. For instance, film projects are frequently organized as LPs, and family estate planning often leverages the advantages of LPs.

Limited Liability Partnership

Protection of personal assets: In an LLP, all partners are typically not mandated to utilize personal assets to settle business liabilities and debts.

Note: An LLP does not protect partners from liability for their individual actions. For instance, the LLP will not shield owners for their personal professional misconduct.

1. Flow-through taxation: The business itself is not subject to income tax. Losses and profits are documented on the partners’ individual tax returns, and any applicable tax is paid at the personal level.
2. Simplified general partnership transition: LLPs usually offer a simpler conversion from a general partnership to an LLP compared to transitioning to an LLC or corporation.

Partnership Disadvantages

Liability

If you are comparing an LLC vs a limited partnership, you should know that with a limited partnership, the general partners face unlimited liability. While limited partners enjoy reduced liability, they must be cautious not to involve themselves in management to maintain their limited liability status.

Management

While partnerships provide flexibility in management, decisions made by one partner in a limited liability partnership or general partnership can legally bind the other partners. This is something to bear in mind when considering an LLC vs a limited partnership.

For instance, if one partner decides to make an agreement without informing the others, all partners are still bound by the agreement’s terms.

This also applies to credit obligations; when one partner secures a loan, it becomes a collective responsibility for all partners.

With regard to a limited partnership, the limited partners have no role in decisions related to management and are only responsible for their initial investment.

Unexpected Dissolution

Regarding an LLP or LP, the state statutes may stipulate that the disassociation of a partner brings about dissolution, unless the partnership agreement contains provisions addressing this scenario. Again, something to bear in mind when considering an LLC vs a limited partnership.

Reasons for Establishing an LLC

If you are thinking about an LLC vs a limited partnership, there are numerous motives for opting for an LLC over a partnership, encompassing considerations of ownership roles, liability, and more. Foremost, an LLC combines the advantages of both a partnership business structure and a corporation. This renders LLCs an optimal business framework for enterprises with medium to higher risk levels, safeguarding owners with substantial personal assets. Please contact our LLC attorney when you’re ready to for your company.

Limited Liability

When considering an LLC vs a limited partnership, know that the members (or owners) of an LLC enjoy safeguarded personal liability for the actions of the LLC and fellow members. Consequently, creditors are barred from pursuing members’ personal assets, such as homes or savings accounts, to settle company debts. This stands in contrast to general partners, whose personal assets can be targeted to settle the business’s debts.

Enhanced Flexibility

When considering an LLC vs a limited partnership, know that an LLC boasts a wide array of options in terms of its management setup. The members of an LLC can be partnerships, individuals, corporations, or trusts, with no restriction on the quantity of members. Additionally, an LLC may choose to have its members oversee daily operations (member-managed), or delegate these responsibilities to non-members (manager-managed).

Elevated Credibility

When considering an LLC vs a limited partnership, know that operating as an LLC can potentially enhance the credibility of a new business more than if it were structured as a general partnership.

Disadvantages of Establishing an LLC

Cost

When considering an LLC vs a limited partnership, know that the initial setup cost for an LLC is greater than that for a general partnership and aligns more closely with that of a corporation. Unlike general partnerships, LLCs incur fees for filing formation paperwork and annual expenses.

Banking

When considering an LLC vs a limited partnership, know that negotiating a business check can be complex. Some banks exclusively allow you to deposit checks made out to an LLC. Others may permit designated account signatories to cash a business check provided proper verification.

Maintaining Separate Records

When considering an LLC vs a limited partnership, know that to mitigate personal exposure risk, a limited liability company should take measures to demonstrate that the company is distinct from its owners. This encompasses maintaining records of significant business decisions, avoiding the mingling of personal and business assets, and meeting LLC obligations (such as keeping minutes, filing annual reports, paying filing fees, and so forth).

Which is better limited partnership or LLC?

With an LLC, the members of the LLC are not personally liable for obligations of the LLC. Limited partners are only liable for the partnership’s debts equal to their investment in the partnership. An LP allows investors (limited partners) to invest without having a management role or any personal liability, while the general partners carry all the liability.

If you are comparing an LLC vs a limited partnership for your business, examining these details collectively can assist you in determining the most suitable business structure for you and your associates. The following is an overview of the primary distinctions in terms of liability, ongoing obligations, taxes, and management.

Limited Liability Protection/Protection of Assets

LLC: When considering an LLC vs a limited partnership, LLCs shield proprietors from personal liability concerning company debts and legal actions. This secures the personal assets of all owners.
Limited Partnership: When considering an LLC vs a limited partnership, a limited partnership extends personal liability protection exclusively to specific partners. The general partner holds personal liability for the business’s debts and shoulders a significant portion of the risks.
Limited Liability Partnership: When considering an LLC vs a limited partnership, an LLP’s general partners enjoy limited liability, and LLPs are often mandated to maintain insurance policies covering personal liability. In certain states, the company interests of LLP owners may have less protection from the claims of their personal creditors compared to an LLC. In these states, partners may not be accountable for contractual debts but could still be responsible for torts.

Formation and Continual Obligations

Limited Liability Company

When considering an LLC vs a limited partnership, setting up a limited liability company can often be less difficult compared to establishing a typical corporation. That said, in the case of multi-member limited liability companies, owners need to enter into an operating agreement that outlines the members’ rights and duties.

LLCs are also mandated to file articles of organization with the appropriate state authority. These papers typically specify the LLC’s name, location of its primary office, whether it is managed by managers or members, the identities of those responsible for management, the address and name of the registered agent, and any predetermined LLC duration or term, among other statutory requisites.

While the majority of states impose fewer compliance demands on LLCs in comparison to corporations, both corporations and LLCs are obligated to uphold fundamental recordkeeping. This encompasses maintaining governing documents, lists of shareholders and members, and specific tax filings. Additional requirements encompass submitting annual reports, covering annual fees, and upholding an office and a registered agent.

Limited Partnerships/Limited Liability Partnerships

When considering an LLC vs a limited partnership, both of these partnership structures have formation and continuous obligations similar to those of an LLC. This includes managing initial and ongoing documentation and fees.

It is worth noting that all companies are still subject to specific local and state business requisites, such as meeting business licensing and permitting obligations and registering “doing business as” (DBA) names. These requirements apply regardless of whether you operate as an LLC or any kind of partnership.

Pass-Through Taxation

Limited Liability Company

When considering an LLC vs a limited partnership, an LLC does not stand as a distinct taxable entity, meaning that no federal tax is paid at the company level. Instead, all deductions and business earnings are passed on to the owners.

If an LLC chooses not to be taxed as a corporation, it will be taxed as if it were a partnership. Therefore, the concept of “LLC taxation” doesn’t actually exist. A limited liability company with more than one owner is taxed under the applicable subchapter of the Internal Revenue Code (IRC) for corporations (Subchapter C or S) or partnerships (Subchapter K).

Limited Partnership and Limited Liability Partnership

Both forms of partnerships enjoy the advantages of pass-through taxation.

Management and Flexibility

Limited Liability Company

When considering an LLC vs a limited partnership, an LLC’s operating agreement can be used to delineate decision-making authority and management roles in a manner that aligns with your business requirements. Owners can determine whether all members will partake in the management of the company or if decision-making authority and management will be delegated to specific members or non-members.

Limited Partnership

When considering an LLC vs a limited partnership, a limited partnership necessitates the presence of at least one general partner and at least one limited partner. Limited partnerships permit the infusion of more capital via limited partners, who function as “silent partners” while the general partners retain control of the company. In this scenario, the partnership agreement stipulates the general partners’ management roles, liability, and duties.

Limited Liability Partnership

When considering an LLC vs a limited partnership, know that an LLP is mandated to have at least two owners, or partners. Upon establishment, the partners enter into a partnership agreement specifying responsibilities, management duties, and liabilities for each partner.

This partnership agreement may also facilitate the addition or retirement of partners, simplifying the process of incorporating partners who bring existing business with them.

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