Delaware Limited Partnerships (LP) and Limited Liability Companies (LLC) may seem similar to new business owners due to their flexibility and pass through tax treatment. However, understanding the differences between LLCs and LPs in structure, personal liability, and reputation is important when choosing the best entity for your new business.
Organizers of LLCs and LPs are given similar levels of flexibility in how they define the rights and responsibilities of the entity's members, as well as how the entity is structured. These aspects are defined via the Operating Agreement (LLCs) or Limited Partnership Agreement (LPs); both of which are internal agreements that remain in force until amended or changed by unanimous consent of all company members or partners.
For instance, investors in an LLC or LP company can provide for whatever voting or economic terms they desire, and can alter the standard of care and fiduciary duties which participants in the business owe to one another. Delaware law provides certain limited default terms that will govern in the event that the operating agreement of the entity is silent on an issue, but the LLC and LP forms are each intended to give maximum effect to the participants’ freedom to contractually provide for terms they deem appropriate.
Pass-through tax treatment, common to both limited partnerships and limited liability companies, typically means that the business itself is not subject to federal income tax. However, each investor will often be required to report his/her 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.
A limited partnership is composed of general partners and limited partners. A general partner may be responsible for daily management of the company, but limited partners can only invest in the business and share its profits or loss. Limited partners cannot be active participants in the day-to-day operations of the company.
A limited liability company 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's Operating Agreement. Unless the Operating Agreement states otherwise, all members have the right to participate in the business' management.
Perhaps the most important difference between a limited partnership and an LLC relates to the personal liability of the participants. A limited partnership is managed by one or more general partners who 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 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.
Learn more about General Partners and Limited Partners.
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, in the same way that a general partner could in an LP, but each member’s role can be defined differently in the LLC’s Operating Agreement.
A participant engaged in the management of the business is typically not held personally responsible for the liabilities of the LLC, vs LPs are typically held personally responsible for the liabilities. Consequently, if an LLC is involved in a lawsuit, the members’ homes, cars and personal bank accounts are not typically considered at risk for the LLC's obligations
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