LLC and LP: Everything You Need to Know
LLC and LP are business entities that you can choose from for your business. Before, entrepreneurs only had the choice between a partnership or a corporation.3 min read
LLC and LP are business entities that you can choose from for your business. Before, entrepreneurs only had the choice between a partnership or a corporation. Now, we have the addition of limited liability companies (LLCs) and limited partnerships (LPs) as great options. In order to find which form will work for you, you will have to look at different aspects of your business.
What Is a Limited Liability Company?
An LLC has a mix of advantages from other forms. Owners, or "members," have flexibility in determining management, membership, and whether the LLC will be considered a corporation or partnership for tax reasons. You can choose to have meetings, give reports, and divide the profits as you like.
What Is a Limited Partnership?
LPs have at least one general and limited partner. Managerial duties and partnership liabilities fall on the general partners. Limited partners, usually investors, only fund the business.
How LLCs and LPs Are Similar: Flexibility
Business structure, rights, and duties are stated in the Operating Agreement in LLCs and the Limited Partnership Agreement in LPs. Most states will give you the freedom to leave terms out of the agreement.
How LLCs and LPs Are Similar: Pass-Through Tax Treatment
The advantage of pass-through tax treatment is that you will only be taxed as an individual. However, you must report all of what was distributed to you, such as the profits, losses, and deductions. If you need more details, seek advice from an accountant or tax professional.
Differences Between LLCs and LPs: Structure
- Two individuals are the minimum needed to form an LP.
- An LLC can have many members, who are not limited to individuals.
- The IRS compares the tax filings of the members to the LLC's filed 1065 Form.
- Registration through the state's secretary must be done by LLCs, but not LPs.
Differences Between LLCs and LPs: Personal Liability
- If an LP has debts that aren't paid off, a judge can use the general partners' assets to pay them back. The limited partners are not held responsible for these debts.
- Having an LLC act as a general partner to the LP can avoid personal liability, but it could add costs and make the structure more complex.
There is always the question as to why someone would want an LP if there's personal liability. Due to the LLC form being newer in the business world, some new owners choose to form an LP instead.
Differences Between LLCs and LPs: Reputation
The most popular form owners choose to start in Delaware is the LLC. During 2014, 72 percent chose LLCs while 5.8 percent chose the LP form.
Pros and Cons of an LLC
- The members of the LLC can either manage the company themselves or have someone else with experience do the managing. The number of members and who can be a member does not have to be reported to the state.
- If the LLC is failing, tax relief is available.
- It can be hard to make decisions due to having many members.
- If a member passes away, the LLC would dissolve.
- Taxation of an LLC varies by state. Some states don't allow many companies to be an LLC. Others will tax LLCs like corporations. This makes working with multiple states difficult.
Pros and Cons of an LP
- There are tax deductions for those employed in an LP.
- If a limited partner passes away or quits, the LP will not end. However, if a general partner passes away or quits, the LP can dissolve. The remaining partners can stop this from happening by agreeing, in writing, to continue.
- Corporations can't have ownership.
Common Types of LLPs
Law and medical offices, for example, are usually under the LLP entity. They typically have the same structure as an LP. Junior and silent partners' shares are smaller than those who are managing the company.
Common Types of LLCs
LLCs are great for small businesses with many owners; many of the states require LLCs to have at least two owners.
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