Limited Partnership vs LLC: Any Difference?
Are you in the process of starting your own business, but you’re not sure whether the limited partnership or the limited liability company is the right choice for you?
These business structures are both quite popular, and there’s a considerable amount of differences between them, so it’s important to make sure that you fully understand what they share in common, as well as what sets them apart.
In this article, we’ll break down all the details of the limited partnership and the limited liability company, in an effort to help you determine which one you should choose to operate your business.
What Is a Limited Partnership?
A limited partnership (LP) is a formal business structure for companies operated by at least two partners. The key aspect of an LP to understand is that this business entity includes a minimum of one general partner, as well as one limited partner.
In an LP, the general partner is more involved in the daily operations of the business, as the limited partner does not share in the management side of the company. In addition, the limited partner has no liability beyond their own investments into the limited partnership itself. You’ll often see the term “silent partner” used to describe limited partners, because they are not involved directly in the day-to-day minutiae of running the business.
The major appeal of the limited partnership is its ability to attract passive investors who don’t want any managerial involvement beyond simply contributing money to the company. With this business entity, bringing in limited partners is a great way to generate financial investments into your company without having to share management power.
A limited partner also receives personal asset protection. If the business was instead formed as a corporation, a personal lawsuit can include the acquisition of a shareholder’s stock, which could result in the creditor gaining some level of control over the company. With an LP, the limited partner’s interest in the business is protected from creditors, which is another way to further decrease the risk of bringing this type of partner into your company.
What Is a Limited Liability Company?
The limited liability company (LLC) provides personal asset protection to all of its members, which means that each owner can be as involved or uninvolved as they want to be in the managerial aspects of the business, without having to worry about whether it’s affecting their limited liability status.
There are no limitations for LLCs regarding how many members they can have, and the structure of the entity itself is quite flexible. The rules and regulations the company chooses to operate under are typically described in the operating agreement, a brief document that lists important details like the identities of the members, the name and location of the company’s registered agent, etc.
Similarities of the LP and LLC
Before we start discussing the ways the limited partnership differs from the limited liability company, let’s quickly run down a few of the ways these business entities overlap.
- Pass-Through Taxation: Both the LP and the LLC are considered to be pass-through companies. This means that the profits and losses of each company pass through the business itself, and the net income is instead taxed on the individual level for each owner.
- Limited Liability: The limited liability company and the limited partnership both protect owners’ personal assets, although the LLC offers limited liability protection to all owners, whereas the LP only provides it to the limited partners. (More on this in a moment!)
- Flexibility: Both of these business entities are far more flexible than the rigid structure of a corporation. The responsibilities and roles of each owner are open to interpretation in the startup phase for an LP or an LLC, and they can be amended later as well if all of the owners agree to it.
Advantages of the Limited Partnership
One area where the limited partnership has an advantage over the limited liability company is in attracting investors. LLCs are considered to be an unappealing business entity when it comes to bringing in outside investments. Venture capital funds aren’t allowed to invest in any pass-through company, which is obviously a disadvantage for both the LP and the LLC. However, whereas the LP can still attract investments because of the limited partner aspect, the LLC doesn’t really have any sort of comparable attraction for investors.
Deductions, deductions, deductions! Limited partnerships are eligible for many more tax deductions than LLCs are. An LP can provide deductions for health insurance, pension plans, 401(k) expenses, and more. On the other hand, a limited liability company allows owners to claim some tax losses, but this is a pretty limited application that doesn’t help many LLC members.
Limited partnerships are also legally consistent across all 50 states, but each state has its own rules and regulations for limited liability companies that can sometimes muddy the waters regarding compliance issues. With an LP, there are usually no such questions.
Another advantage of being a limited partner is the fact that they are not required to pay self-employment taxes, which are currently set at a rate of 15.3%, the combined rate of the employer and employee portions of Medicare and Social Security. LP general partners and all members of limited liability companies are required to pay this tax rate on the income they generate from the business.
Advantages of the Limited Liability Company
A limited partnership must have at least two members, but the limited liability company can be operated by any number of owners. In fact, the single-member LLC is quite common, and is a great way for a self-employed individual to give themselves some legal protections when working.
Another area where the LLC has a leg up compared to the LP is when it comes to personal asset protection. Whereas every member of a limited liability company enjoys the same protections when it comes to limited liability, only the limited partners in an LP receive that same protection.
Continuing along those lines, a limited partnership requires at least one limited partner, also known as a silent partner. If that silent partner decides that they would like to take a more active role in the daily operations of the business, they may not be able to do so if the company is registered as a limited partnership. On the other hand, the LLC doesn’t require specific roles and a situation like this would pose no problem.
The limited partnership and limited liability company each have their advantages and disadvantages. In general, the LP is probably the better option if you have a limited partner lined up, but otherwise we would recommend the LLC. The LLC’s limited liability protection provides more security than that of limited partnerships, which only provide this protection for the limited partner.
While the LP is a solid business structure for certain businesses, the LLC has wider applications to a larger variety of companies. It should be noted that the LLC is a more popular business entity than the LP as well, probably due to this distinction.
We hope this article helped explain the differences between the limited partnership and the limited liability company, and we wish you luck regardless of which one you choose to form!