Key Takeaways

  • Both LLCs and limited partnerships (LPs) provide limited liability and pass-through taxation, but they differ in management structure and partner liability.
  • In an LLC, all members can participate in management without losing liability protection; in an LP, only general partners manage the business and assume full liability.
  • LLCs are more flexible for small and medium businesses, while LPs often suit investment and real estate ventures with passive partners.
  • LLCs must file Articles of Organization, whereas LPs file a Certificate of Limited Partnership with their state.
  • The right choice between LLC vs limited partnership depends on business goals, management preference, and desired liability structure.

Comparing LLC vs. limited partnership is essential when starting a business. 

In the past, corporations and partnerships were the only options entrepreneurs had for starting a business. Today, there are more business formation options, and most business owners start with a limited partnership (LP) or a limited liability company (LLC).

LLCs and LPs are two of the most popular business options because they offer:

  • Flexibility
  • Management control
  • Pass-through taxation
  • Limited liability

For tax purposes, both LLCs and LPs are treated as general partnerships. However, they offer a major advantage of corporate-style limited liability. Some business owners even choose to combine the two structures, forming an LLC as a general partner to mitigate liability problems better.

Most states allow business owners to form limited partnerships and limited liability companies. However, check with your secretary of state to make sure you can form your preferred structure. Which structure you choose largely depends on:

  • Your goals
  • The type of business

All About Limited Liability Companies

An LLC is a hybrid business structure that mixes characteristics of:

Each owner, who is referred to as a "member," enjoys limited liability similar to that of a corporate stockholder. With an LLC, owners can be:

  • Individuals
  • Partnerships
  • Estates
  • Trusts
  • Other LLCs
  • Corporations

Many entrepreneurs choose an LLC structure because it offers more flexibility than a corporation. For example, there are no limits on the number of members an LLC may have. LLCs also boast partnership-style tax advantages, such as pass-through taxation.

Perhaps most importantly, LLCs do not pay their own taxes. All profits and losses pass on to members, who then report the finances on their personal income taxes. With pass-through taxation, members are not subjected to double taxation such as with a corporation. They also receive tax relief if the LLC performs poorly.

Unlike a corporation, LLCs do not have to observe certain formalities such as:

  • Holding director meetings
  • Submitting annual reports
  • Satisfying shareholder requirements

Members can also choose how to allocate profits and losses, depending on partnership interests and ownership.

Limited liability companies are recognized in every state, plus the District of Columbia. Every state also permits single-owner LLCs. Some states, however, do tax LLCs like corporations.

Best of all, a business that is currently a sole proprietorship can change its structure to an LLC using "check-the-box" regulations, which doesn't come with any federal tax consequences.

Unlike a basic partnership, LLCs need to register in their state through the secretary of state's office. Compared to a partnership, an LLC can separate business and personal assets and liabilities, although an LLC must report earnings using IRS Form 1065.

LLC Management and Liability Structure

One of the defining features of an LLC is that it allows all members to take part in management without exposing their personal assets to business debts. Members can structure the company as member-managed—where everyone participates in day-to-day decisions—or manager-managed, where a designated manager runs operations while members act more like passive investors.

LLCs offer liability protection similar to corporations, meaning creditors can pursue business assets but not the personal assets of members, such as their homes or savings. This protection applies even when members actively manage the business, unlike in an LP where management triggers full liability for general partners.

Additionally, LLCs provide flexibility in profit distribution—earnings don’t have to align strictly with ownership percentage. Members can create an Operating Agreement to define voting rights, capital contributions, and payout terms that fit their business model.

All About Limited Partnerships

A limited partnership (LP) is a business with one or more general and limited partners. General partners participate in management activities and are liable for partnership obligations. Limited partners have no liability and do not participate in management activities beyond their investment in the business. However, limited partners do receive profit shares based on their capital contributions.

Most partnerships choose an LP structure because passive investors like the idea of not being liable for the company's debts and other obligations. They also enjoy personal asset protection.

Another benefit to forming an LP is that it's easier to advertise limited partner interests purely as investments, allowing general partners to raise capital without having to hand over management roles to outside investors. LPs also cannot be dissolved if one of the partners:

  • Passes away
  • Is replaced
  • Leaves the company

Unlike corporations, limited partnerships protect each partner's interests from being confiscated when the partner is personally sued. In a corporation, a shareholder's stock can be taken away in a personal lawsuit.

LPs also have similar tax advantages to LLCs, although corporations cannot own them.

Limited Partnership Structure and Roles

In a limited partnership, there must be at least one general partner and one limited partner. General partners oversee operations, make decisions, and bear unlimited personal liability, while limited partners act as passive investors who risk only the amount of their contributions.

LPs are often used for real estate ventures, family businesses, or private equity funds where investors contribute capital but do not want operational involvement. The limited partnership agreement outlines how profits are divided and how new partners may join.

Unlike LLCs, LPs cannot easily alter partner roles without significant restructuring. This makes them less flexible but appealing for businesses seeking clear divisions of management and investment responsibilities.

LLC and LP Similarities

Limited liability companies and limited partnerships are similar in the following ways:

  • Flexibility: Founders are flexible in how they structure the business and define owners' rights and responsibilities.
  • Pass-through taxation: The business itself doesn't pay federal income taxes; instead, the members or partners report business income and losses on personal tax returns.

Choosing Between an LLC and a Limited Partnership

When deciding between LLC vs limited partnership, consider your management goals, funding needs, and risk tolerance.

  • Choose an LLC if you want all owners to share management responsibilities while maintaining limited liability. LLCs are generally easier to run, require less formal documentation, and suit most small businesses.
  • Choose an LP if you plan to attract passive investors or operate in industries like real estate or venture capital where silent partners are common.

Also, note that LLCs can have unlimited members, while LPs must maintain a specific partner balance. LLCs generally provide greater flexibility in taxation, management, and profit allocation, while LPs provide structured investment control.

Both structures must register with the Secretary of State and comply with annual reporting and renewal obligations to remain in good standing.

Tax Options and Reporting for LLCs

LLCs are automatically treated as pass-through entities, meaning income flows directly to members’ tax returns, avoiding corporate-level taxation. However, LLCs have the option to elect corporate or S corporation taxation if advantageous. This flexibility can help minimize self-employment taxes and optimize business deductions.

Single-member LLCs are treated as disregarded entities by the IRS, while multi-member LLCs are taxed like partnerships by default. Regardless of size, all LLCs must file Form 1065 (for multi-member) or report income via Schedule C (for single-member). These rules provide small businesses more control over how profits are taxed compared to corporations or LPs.

Liability and Legal Protections in LPs

While limited partners in an LP enjoy liability protection, this protection can be lost if they participate in management. General partners, on the other hand, are personally liable for the partnership’s debts. To mitigate this risk, many LPs create an LLC to serve as the general partner, combining LP fundraising advantages with LLC liability protection.

LPs also differ in how they handle lawsuits and ownership disputes. Creditors cannot seize limited partnership interests to satisfy personal debts, but they may issue charging orders to claim distributions. This protection can make LPs attractive for asset protection and estate planning.

Frequently Asked Questions

1. What is the main difference between an LLC and a limited partnership? An LLC allows all members to have management authority and liability protection, while an LP separates owners into general partners (with full liability) and limited partners (with limited liability).

2. Can an LLC be used as the general partner in a limited partnership? Yes. Many businesses create an LLC to serve as the general partner in an LP to limit personal liability while maintaining centralized control.

3. Which is better for real estate investment, LLC or limited partnership? Both can work, but LPs are common for structured investment deals involving passive investors, while LLCs suit smaller property owners seeking flexibility and protection.

4. Do LLCs and LPs file the same formation documents? No. LLCs file Articles of Organization, and LPs file a Certificate of Limited Partnership with the state. Both must include a registered agent and comply with local laws.

5. Can limited partners participate in management? Limited partners should avoid management roles to maintain liability protection. If they actively manage, they risk being treated as general partners legally.

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