LLC vs LP: Everything You Need to Know
LLC vs LP refers to the difference in corporate structure between a Limited Liability Company and a Limited Partnership.3 min read
LLC vs LP
LLC vs LP refers to the difference in corporate structure between a Limited Liability Company and a Limited Partnership. There are advantages and disadvantages to the formation of either these type of business entities.
Business Structure Types
- Corporation—a business that is completely independent from its owners, who are known as shareholders, for tax purposes.
- Multiple-Owner Business—this type of business is owned by multiple individuals and includes structures like LLCs and partnerships.
- Single-Owner Business—this is a business that is owned by one individual. It can be a sole proprietor or a single-owner LLC.
Selecting a State for Your Business
Each state has a Department of State with a Secretary of State that sits at its head. This department, through a division, unit, or office, handles business entities for the state. For example, in Florida the Secretary of State’s Division of Corporations handles the filings for business entities. Each state has its own set of regulations and limitations on businesses that want to register in their state.
All states allow corporations, Limited Liability Companies, and partnerships but not all variations of those. Neither a sole proprietorship or an S corp are formed at the state level. The following are the types of corporate structures you may be interested in forming:
- Sole proprietorships are treated as part of an individual for tax purposes. The personal tax returns of the individual include the business’s profits and losses. Any liability and debt are also assumed by the individual.
- Corporations are business entities which are completely independent of their owners for tax purposes. Corporations are formed at the state level, when a business entity files their Articles of Incorporation.
- S corps are elected for tax purposes. It is the Internal Revenue Service’s subchapter S corporation that determines that the profits and losses flow through to the individuals.
- Limited Liability Companies are set up at the state level by a business entity filing its Articles or Oganization with the Secretary of State, in the state in which they will operate.
The flexibility of the LLC corporate structure is popular because:
- LLCs can have one member or more than 100.
- LLCs have no state reporting requirements.
- LLCs do not pay taxes, so income from them is only taxed once.
- Members of a LLC have the personal asset protection of a corporation.
- Tax flexibility means that a LLC can be taxed like a sole proprietorship, partnership, a corporation or S corp
- Partnership is a business entity where the partners share the benefits and risks of the business. Some partnership agreements make one or more general partners who bear the liability for the business debts. Limited partners may be merely investors who do not participate in the management or operations of the business.
- Professional corporations are a specific kind of business that conducts professional services like attorneys, accountants, doctors or architects.
- Limited Partnerships are type of partnership that has both general partners and limited partners. A limited partnership is an entity independent of the owners (partners).
Differences Between Limited Liability Companies and Limited Partnerships
The difference in structure between a limited partnership (LP) and a limited liability company (LLC) is the presence of an Operating Agreement in a LLC. While limited partners cannot be active participants in the operations of the business, the Operating Agreement in LLCs designates who manages the business (it may be owners or professional managers). So while a limited partnership is strict in its delegation of duty, a limited liability company is much more flexible.
Personal liability is different in LPs and LLCs, because there are two different partnerships in a limited partnership. General partners are personally liable for the business’ legal obligations and debts.
For both the members of a LLC and the limited partners in a LP, liability protection keeps their personal assets safe from being at risk for the business’ debts and obligations. As with every decision about your business you should consider getting professional legal and accounting advice along the way to protect your business and yourself.
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