Limited Partnership LLC: Everything You Need to Know
A limited partnership LLC is a combination of two business structures where the LLC serves as a general partner in order to limit its liability.3 min read
2. What is a Limited Liability Company?
3. What Is a Limited Partnership?
4. How LLCs and LPs Are Similar
LLC or LP: What's Best for Your Business?
If you choose the best structure for your business, you can save a great deal of money on:
- Filing fees
- Overhead costs
Some abbreviations that are commonly used for popular business structures include:
- C Corp.
- S Corp.
In the past, business owners were only able to form companies as corporations or partnerships. Today, a number of available business structures are available, including limited partnerships (LP) and limited liability companies (LLC).
For tax purposes, both LPs and LLCs are treated as general partnerships. However, in terms of liability, these structures provide identical protections as corporations. It is possible to combine LPs and LLCs in order to increase liability protections. Learning the benefits and drawbacks of these two different business structures can help you decide which best suits your needs.
What is a Limited Liability Company?
Rules for corporations, such as the need to file an annual report and conduct shareholder meetings, do not apply to LLCs. LLCs also allow losses and profits to be distributed with more flexibility than other business structures. For instance, where corporations must provide shareholders with profits commensurate to their ownership shares, an LLC may disregard contribution of capital when allocating profits to members.
All fifty states, as well as the District of Columbia, recognize LLCs and allow for the formation of single-member LLCs. Also, thanks to simplified IRS rules, it is easy to transition from a sole proprietorship to an LLC without fear of tax penalties. An LLC will be dissolved if one of its members dies or files for bankruptcy.
What Is a Limited Partnership?
A limited partnership combines both limited and general partners and must include one or more of each. General partners in an LP are completely liable for obligations of the partnership and also participate in managing the business. In general, LPs are formed because the reduced liability of limited partners can be a good way to attract investors who are not interested in managing the company. This also makes it easier for general partners to run the business, as they will not need to consult outside investors in order to raise capital for the company. Another benefit of LPs is that assets will be protected.
One of the major differences between a limited partnership and a corporation is that the interests of partners in an LP will be shielded when an individual partner is sued. If the shareholder of a company is sued and loses in court, their stocks can be confiscated.
Employees of LPs have access to beneficial tax deductions. For example, even limited partnerships with only one partner can make deductions for entertainment expenses and health insurance. General partners have the ability to make deductions for expenses from their 401(k) and can also deduct their pension plan.
It is also possible for limited partnerships to last in perpetuity. When one of the limited partners passes away or leaves the partnership, the LP does not need to be dissolved as long as the proper conditions are fulfilled. If all general partners and a portion of the remaining limited partners come to a written agreement within a specified time frame, the LP can continue.
How LLCs and LPs Are Similar
LLCs and LPs are similar in a variety of ways, including flexible organization and the ability to be treated as a pass-through entity for tax purposes. Whichever structure you choose, an LP or LLC, you will be able to designate partner and member responsibilities however you desire. You will also be able to structure your entity in whatever way best suits your business.
If you choose an LLC, the structure of your business will be outlined in an Operating Agreement. The structure of an LP is described in a Limited Partnership Agreement. These two types of agreements are meant to be internal documents and should be agreed upon by all partners or members.
Both LPs and LLCs can be treated as pass-through entities, which means the company will not have to pay federal income tax.
If you need help forming a limited partnership LLC, you can post your legal needs on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.