There are several similarities between a limited liability company and a limited partnership, such as flexibility and pass-through tax treatment.
However, there are also distinct differences you should consider when deciding between these two business entities, such as structure, personal liability and reputation.
How LLCs and LPs Are Similar
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 issues are defined via the Operating Agreement (LLCs) or Limited Partnership Agreement (LPs); both of these 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 limited partnership 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 limited partnership forms are each intended to give maximum effect to the participants’ freedom to contractually provide for terms they deem appropriate.
- 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 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.
The Differences between LLCs and LPs
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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.
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.
- 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 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.
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.
Learn more about General Partners and Limited Partners.
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 and personal bank account are not typically considered at risk for the LLC's obligations.
The Delaware LLC is by far the most popular type of Delaware entity. In 2014, nearly 72 percent of the state of Delaware's new formations were LLCs, while approximately 5.8 percent were LPs.
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