If you’re thinking of incorporating a company, it’s crucial to know the differences between each business structure. You should consider the distinct advantages and disadvantages of these options to have an informed decision on which structure is suitable for your business. Thus, our team decided to compare and evaluate limited partnership vs LLC in this review.
Limited Partnership or LLC
What is an LLC?
Before we compare these business structures, small companies and corporations must understand how LLC and Limited Partnership entities differ based on their characteristics alone. Unlike LP, a limited liability company (LLC) doesn’t hold its member with any personal liability.
This hybrid business structure includes several corporation perks similar to partnerships or sole proprietorships. Regulations may vary based on states, but business owners involved in an LLC business organization are generally composed of two or more members.
Pros and Cons of Forming an LLC
Many LLC owners formed limited liability companies mainly because this entity legally separates business debts from your personal liability. Besides, the tax advantage of being charged as a sole proprietor, partnership, S corporation, or C corporation, an LLC company has less paperwork and lower filing fees.
LLC business structures have flow-through income taxes that keep tax treatment simple. Members could also receive revenues from business profits larger than their ownership percentage. If your company is tight on budget, our team advises you to think thoroughly as renewal fees and requirements are costly.
What is a Limited Partnership?
Despite common misconceptions, Limited Partnership (LP) is different from a regular general partnership [1]. An LP business entity must be composed of at least 1-2 general partners responsible for management decisions.
On the other hand, a limited partner in an LP company doesn’t have many partnership obligations except for their return on the investment.
Pros and Cons of Forming Limited Partnership
Tying down personal liability to the extent of investment that limited partners made is among the many perks of businesses under an LP structure. Unlike general partnerships, an agreement states that limited partners have restrictions when it comes to obligations concerning profits and losses.
However, as the LP business owner and general partner, your liability is much more diverse than a regular limited partner or member. As opposed to a general partnership, filing paperwork can be more complex as this entity has general partners and limited partners.
Differences Between an LLC and a Limited Partnership
Structure and Organization
LLC and LPs differ in terms of organizational hierarchy. In an LLC, the ownership interest lies in the members written in the company’s articles of organization, often filed to the office of the secretary of state. Along with this, LLCs also abide by the operating agreement for the rights and responsibilities of each member.
On the other hand, limited partnerships consider general partners and owners to be treated on equal footing in this entity. A general partner is expected to manage operations, whereas limited partners are regarded as passive investors rather than co-owners.
Despite the management rights bestowed to general partners, both members have specific ownership percentages in the LP entity.
Taxation
Comparing the tax treatment between LLCs and LPs is a crucial step our team wouldn’t leave out in this review. Upon formation, both LLC and LP have the same purpose for taxes. The primary contrast is an LP isn’t allowed to be elected as a corporation, unlike LLCs.
Although some states charge LLCs with corporation taxes, it operates as pass-through entities, making its members capable of reporting losses and profits through personal tax returns. Contrarily to LLCs, if you’re an LP without partners or members, your company is entitled to certain deductions on taxes.
Liability
One of the most crucial factors our team suggests looking into is the liabilities. Members or partners of actively operating LPs are liable to the extent that creditors can go after their personal bank accounts and properties in the event that company assets and business income are insufficient to settle its debts.
Contrastively, LLCs are considered separate entities. Therefore, liabilities are limited, and creditors can’t go after members’ assets.
FAQ
What is the difference between a limited partnership and an LLC?
The difference between a limited partnership and an LLC is the type of organization and liability protection. While LLCs are managed by members, LPs are divided into general partners and limited partners. In terms of liability, assets of LP partners could be at risk upon creditor disputes, whereas LLC members’ assets are secured.
What is the advantage of an LLC over a limited partnership?
The advantage of an LLC over a limited liability partnership is the level of asset protection in terms of liabilities. Incorporating an LLC means personal assets cannot be compromised should the business encounter financial and administrative troubles. Unlike LP, an LLC also can be elected as a corporation or partnership entity.
Conclusion
Selecting the best business formation options can help your company in the long run. While our team recommends weighing the benefits of Limited Partnership vs LLC business entities, remember that core differences vary between management duties, tax advantages, and obligations. With this review, you are now able to define which structure is suitable for your business, and the risks you will take in the future.
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