LLC vs. Limited Partnership: What's the Difference?

Clients often ask us to articulate the benefits and drawbacks of forming and operating a business as a limited liability company (LLC) vs. a limited partnership (LP). LLCs and LPs share certain common features. However, they differ in a number of important ways. Read the breakdown below to help you determine which entity type is right for your business:

How LLCs and LPs Are Similar

1. Flexibility

Organizers of LLCs and LPs are given flexibility in how they define the rights and responsibilities of the entity's members or partners, as well as how the entity is structured. These are defined via the operating agreement (LLCs) or limited partnership agreement (LPs)—both are internal agreements that remain in force until amended or changed by unanimous consent of all company members or partners.

2. Pass-through tax treatment

Pass-through tax treatment typically means that the business itself is not subject to federal income tax. However, each investor will often be required to report their share of the business's income, gain, loss, and deduction. For more information on pass-through tax treatment, please speak with an accountant or tax professional.

How LLCs and LPs Are Different

1. Structure

A limited partnership is composed of general partners and limited partners. Limited partners can invest in the business and share its profits or loss, but cannot be active participants in the day-to-day operations of the company.

An LLC can have as many owners (known as members) as it would like. The rights and responsibilities of an LLC's members are outlined in the LLC operating agreement. Unless the operating agreement states otherwise, all members have the right to participate in the business's management.

2. Personal liability

The most important difference between the LLC and LP relates to the personal liability of the participants. A limited partnership is managed by one or more general partners that control the day-to-day operations of the business. These general partners have unlimited personal liability for the debts and obligations of the limited partnership, meaning that they can be held personally liable for those debts and obligations. A limited partner typically does not have personal liability for partnership obligations, but is not permitted to participate in the day-to-day management of the limited partnership.

To avoid the personal liability of a general partner, an entity such as an LLC is often created to serve as the general partner of a limited partnership.

The LLC was created to offer the flexibility of a partnership while providing corporation-like protection against personal liability. One or more of its members can manage an LLC. Unlike in a limited partnership, however, a participant engaged in the management of the business is typically not held personally responsible for the liabilities of the entity. Consequently, if your LLC is involved in a lawsuit, your home, cars, personal bank account, etc. are not typically considered at risk for the LLC's obligations.

3. Popularity

The Delaware LLC is by far the most popular type of Delaware entity. Nearly 80 percent of the state of Delaware's new formations are LLCs, while approximately five percent are LPs.

Ready to form an LLC or LP? Click the button below. You can also reach us via email (sales@delawareinc.com), phone (800-345-2677), or live chat

Order an LLC Now

 

Harvard Business Services, Inc.
16192 Coastal Hwy. Lewes, DE 19958
1-800-345-CORP /// 1-302-645-7400
info@delawareinc.com

Formar una LLC en Delaware, incorporar, crear negocio en Delaware en línea o llame al 1-800-345-2677.

Renuncia

Harvard Business Services, Inc. es un servicio de archivo de documentos que ofrece información general. No podemos prestar asesoramiento jurídico o financiero y el uso de este sitio está sujeto a los términos y condiciones adicionales. BA no está afiliado a la Universidad de Harvard.