LLC vs LP: What’s the Difference?
When starting a business in Delaware, choosing between a Limited Liability Company (LLC) and a Limited Partnership (LP) can be a bit of a headache, but the result could significantly impact your operations. Nevertheless, by understanding the differences between LLCs and LPs in structure, personal liability, and reputation, you will be able to make the most educated decision about your business.
What is an LLC?
A Limited Liability Company (LLC) is a business structure that combines the liability protection of a corporation with the flexibility and simplicity of a partnership. The members of an LLC are generally not responsible for debts or legal obligations associated with the company, hence the “limited liability” in the name. Overall, an LLC offers a simple and adaptable framework for running a business, perfect for small business owners in a wide range of industries.
What is an LP?
A Limited Partnership (LP) is another type of business structure that includes at least one general partner and one limited partner. General partners have unlimited liability for the partnership's debts and manage the business, while limited partners have limited liability but do not participate in management. This setup allows general partners to maintain control over operations while limited partners act as passive investors.
Liability Protection
Perhaps the most important difference between a limited partnership and an LLC relates to the personal liability of the participants. In an LLC, all members enjoy limited liability protection, meaning their personal assets are generally shielded from the company’s debts and lawsuits. This protection applies regardless of whether members are actively involved in managing the business. In an LP, however, only the limited partners receive this protection. The general partner, who manages the business, has unlimited personal liability for the partnership’s debts and obligations, meaning their personal assets could be at risk.
Overall, the LLC offers stronger liability protection for all owners, making it the more secure choice for those who want to participate in management without personal financial exposure. However, LPs still provide valuable protection for passive investors seeking limited involvement.
Taxation
LLCs and LPs are both pass-through entities by default, meaning the business itself generally does not pay federal income tax. Instead, profits and losses pass through to the owners’ personal tax returns.
Instead of pass-through taxation, LLC members can also choose how the business is taxed. LLCs can be taxed as a sole proprietorship, S corporation, or even a C corporation, providing flexibility based on the owners’ financial situation.
Learn more about Delaware LLC Tax Status on our website.
Management Structure
LLCs offer quite a bit of flexibility in their management structures. They can be member-managed, where all owners participate in day-to-day operations, or manager-managed, where members appoint one or more managers to handle business decisions. This allows LLC owners to structure management based on their expertise, involvement level, and preferences, making it suitable for a wide range of business types.
LPs, on the other hand, have a more rigid structure. The general partner (or partners) manages the business and assumes full responsibility for its operations, while limited partners do not participate in management. If limited partners exceed their role and start managing the business, they risk losing their limited liability protection.
While both structures have their advantages, LLCs provide operational freedom for all owners, making them ideal for businesses where multiple members want to be involved.
Formation Requirements
Forming an LLC typically involves filing articles of organization with the state, paying a filing fee, and creating an operating agreement that outlines ownership and management rules. Some states (not Delaware) may also require annual reports and fees. LLC formation is generally straightforward, making it a popular choice for small business owners and entrepreneurs.
Forming an LP requires filing a certificate of limited partnership with the state and designating at least one general partner and one limited partner. LPs often also create a partnership agreement to clarify roles, profit distribution, and responsibilities. While the filing process is similar to an LLC, LPs involve stricter formalities regarding the roles of general and limited partners.
Generally speaking, LLCs are easier to start, with fewer restrictions on ownership and management. LPs, however, clearly define management and investment roles, which can be advantageous when attracting passive investors.
Raising Capital and Attracting Investors
Both entities have avenues to help them raise funds. LLCs can raise capital by adding new members or seeking investments from outside parties. Their flexible ownership structure and limited liability protection make them appealing to entrepreneurs. LLCs can also structure profit-sharing and voting rights to accommodate investors’ preferences.
LPs are particularly well-suited for attracting passive investors. Limited partners can contribute capital without taking on management responsibilities, while the general partner maintains control. This clear division between active management and passive investment often appeals to investors seeking limited risk while still sharing in profits.
Differences Between LLCs and LPs
LLCs and LPs are two popular business structures, each with distinct advantages in liability protection, taxation, management, formation, and raising capital. While LLCs offer flexibility and strong liability protection for all owners, LPs provide a clear separation between active managers and passive investors, making them attractive for certain investment-focused ventures.
The graphic below breaks down the differences between LLCs and LPs to help you quickly compare which structure might be the best fit for your business.
Should I Form an LLC or an LP?
Limited Liability Companies and Limited Partnerships each have their own string of pros and cons when compared to one another. Ultimately, the choice between an LLC and an LP depends on your preferences for management structure, liability tolerance, and taxation. If you’d like to speak with one of our representatives to help you make a better decision, feel free to contact our team.
At Harvard Business Services, we've formed over 400,000 businesses since 1981, and we’re here to help you form your Delaware LLC or LP. Choose a button below, give us a call at 800-345-2677, or live chat with us today to get started.
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