Is an LLC a Partnership?
Is an LLC a partnership? This is a common question when comparing business organization types.4 min read
2. Limited Partnerships (LP)
3. Limited Liability Partnerships (LLPs)
4. Limited Liability Limited Partnership (LLLPs)
6. LLCs versus Partnerships
7. LLCs versus LPs
8. LLCs versus LLPs
9. LLCs versus LLLPs
Is an LLC a partnership? This is a common question when comparing business organization types. A partnership is two or more people who split ownership in a business. Partnerships don't have a legal identity that is different from its owners. An LLC combines the best aspects of a partnership and corporation. The LLC business organization type has a separate legal existence from its owners, which are called members.
When deciding between setting your business up as a partnership or LLC, you must factor in considerations like liability, management, costs, and taxation. Before choosing, it's best to compare the different business organization types.
Because partnerships require two or more owners, you would have to go with an LLC if you are a single owner. With a partnership, it's typically a general partnership where all partners are active in the day-to-day management activities. Each partner has equal rights when it comes to business operations. Partners are personally liable for any business obligations and debts, just like a sole proprietorship.
Limited Partnerships (LP)
Partnerships have two types of partners, general partners who own and operate the business, and limited partners. Limited partners don't have the right to make decisions and don't have personal liability, they are only investors.
Because they waive their management rights, their liability is capped at whatever their investment amount is. If a limited partner tries to get involved with day-to-day management, their limited liability status will no longer apply.
Limited partnerships can be expensive and just as complicated as setting up a corporation. For example, the ability to sell limited partnership interests are subject to complex securities laws.
Limited Liability Partnerships (LLPs)
Not all states permit partnerships to form limited liability partnerships. LLPs are a general partnership, but offer some limited liability protection.
They are not exempt from any liability for partnership debts and obligations, however, they may be exempted from liability for other partners' actions. The reason some people form LLPs is to protect themselves from malpractice lawsuits against other partners.
With an LLP, all partners share management responsibilities.
Limited Liability Limited Partnership (LLLPs)
There is also an LLLP, which is a limited liability limited partnership. This is essentially a limited partnership but general partners get limited personal liability. There are general and limited partners allowed with an LLLP.
LLCs bring the best of both partnerships and corporations. They are more similar to corporations rather than any of the partnership types. Rather than operate as a sole proprietorship, you can form an LLC with only one member which limits your personal liability.
LLCs versus Partnerships
In LLCs, owners are members rather than shareholders, and executives are managers instead of directors and officers. When it comes to liability, LLCs are always a better choice over a partnership. However, there are additional costs involved in set up and registration.
LLCs versus LPs
LLCs are still typically more advantageous than an LP, as the LLC offers owners personal liability protection. Legal fees and filing costs are higher than forming an LP, though. All LLC members have some say in management and operations whereas limited partners in an LP do not.
You may want to consider forming an LP versus LLC if:
- You prefer investor owners that don't have any management authority.
- You understand the risks and don't mind being personally liable.
- The cost to form an LP is less than an LLC.
LLCs versus LLPs
LLCs provide more comprehensive liability protection versus an LLP. This may not be an option if your state doesn't recognize LLPs.
There are some states that require certain businesses to form an LLP and prohibit them from forming an LLC. These include people like architects, accountants, engineers, and attorneys. You may see it referred to as a professional limited liability partnership, or PLLP, or a registered limited liability partnership, or RLLP.
LLCs versus LLLPs
LLLPs are only recognized in a handful of states. Some of these include Delaware, Florida, Nevada, and Virginia. California doesn't allow you to form an LLLP, but it will recognize those formed in one of the allowed states, provided you pay the annual registration fee of at least $800.
LLLPs and LLCs offer the same liability protection. LLLPs might be preferable over an LLC if:
- You prefer investors to stay out of management duties.
- Your business won't operate in a state that doesn't recognize LLLPs.
- You would save money by filing as an LLLP.
Before deciding on a business organization type, contact your state's agency that regulates businesses. This might be a division of the Secretary of State's office in most cases.
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