Key Takeaways

  • Both LLCs and LPs offer liability protection, but in different ways—LLCs protect all members, while LPs only protect limited partners.
  • LLCs offer flexible management and pass-through taxation, making them ideal for small businesses seeking operational freedom.
  • LPs are better suited for investors or silent partners who contribute capital but don’t manage daily operations.
  • In an LP, general partners are personally liable for business debts, unlike LLC members who enjoy full liability protection.
  • LLCs are easier to form and maintain in most states and can elect how they are taxed (as a partnership, S corporation, or C corporation).
  • LPs are commonly used in real estate, private equity, and investment funds where roles are clearly divided between managing and limited partners.

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.

Understanding LP vs LLC: How Each Structure Works

When comparing LP vs LLC, it’s important to understand how each business structure functions.

A Limited Partnership (LP) includes at least one general partner, who manages the business and assumes unlimited personal liability, and one or more limited partners, who invest capital but have limited liability and no role in daily management.

A Limited Liability Company (LLC), by contrast, offers limited liability to all members and allows for flexible management arrangements—either member-managed or manager-managed. Unlike LPs, LLCs don’t require a general partner, meaning no individual must personally shoulder business debts or liabilities.

LLCs can also elect how they are taxed, offering pass-through taxation by default but the option to be taxed as an S corporation or C corporation. This flexibility makes LLCs appealing to small business owners who want control over their tax treatment.

Business Structure Types

  1. Corporation—a business that is completely independent from its owners, who are known as shareholders, for tax purposes.
  2. Multiple-Owner Business—this type of business is owned by multiple individuals and includes structures like LLCs and partnerships.
  3. Single-Owner Business—this is a business that is owned by one individual. It can be a sole proprietor or a single-owner LLC.

Liability and Management in LP vs LLC

Liability and management are two of the most significant distinctions between LPs and LLCs.

  • Liability:
    • In an LLC, all members enjoy limited liability protection, meaning their personal assets are generally safe from business debts and lawsuits.
    • In an LP, general partners can be personally liable for the company’s obligations, while limited partners risk only their investment.
  • Management:
    • LLCs offer flexible management structures where members can either manage the business directly or appoint outside managers.
    • LPs operate under a stricter management hierarchy—general partners control operations, and limited partners remain passive investors.

Because of these differences, LLCs are often favored by small businesses that value both protection and management flexibility, while LPs are ideal for partnerships where some investors prefer to be silent or passive participants.

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:

  1. LLCs can have one member or more than 100.
  2. LLCs have no state reporting requirements.
  3. LLCs do not pay taxes, so income from them is only taxed once.
  4. Members of a LLC have the personal asset protection of a corporation.
  5. Tax flexibility means that a LLC can be taxed like a sole proprietorship, partnership, a corporation or S corp
  6. 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.
  7. Professional corporations are a specific kind of business that conducts professional services like attorneys, accountants, doctors or architects. 
  8. 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).

Formation and Compliance Requirements for LPs and LLCs

Forming either an LP or an LLC requires registration with the Secretary of State in the chosen state. However, their filing requirements differ:

  • LLC Formation:
    • File Articles of Organization with the state.
    • Create an Operating Agreement outlining ownership and management roles.
    • Pay state filing fees and maintain compliance through annual reports or franchise taxes, depending on the jurisdiction.
  • LP Formation:
    • File a Certificate of Limited Partnership identifying general and limited partners.
    • Draft a Partnership Agreement detailing responsibilities, profit distribution, and voting rights.
    • Most states require at least one general partner to be listed publicly.

Additionally, some states impose annual fees or franchise taxes on both LPs and LLCs. LLCs generally have fewer ongoing reporting requirements, whereas LPs must often update their records when new partners are added or existing ones leave.

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.

Best Use Cases for LPs vs LLCs

Choosing between an LP and an LLC depends on the business’s purpose and structure:

  • LLCs are best for:
    • Small businesses and startups seeking liability protection and tax flexibility.
    • Companies that want all owners involved in management.
    • Businesses expanding across states or hiring employees.
  • LPs are best for:
    • Investment partnerships (e.g., real estate syndications, film production, or venture capital funds).
    • Businesses with passive investors who don’t manage operations.
    • Situations where general partners are comfortable with greater personal liability in exchange for control.

When deciding on lp vs llc, consider long-term goals, number of owners, and desired tax treatment. Consulting with a business attorney or accountant can help determine which structure aligns best with your operational and financial objectives.

Tax Treatment and Profit Distribution

Another critical comparison in lp vs llc is how each entity handles taxes and profit sharing.

  • LLC Taxation:
    • By default, a single-member LLC is taxed as a sole proprietorship, and a multi-member LLC is taxed as a partnership.
    • LLCs can choose corporate taxation (S or C corp status) if beneficial for income-splitting or reducing self-employment tax.
    • Profits and losses are passed directly to members, avoiding double taxation.
  • LP Taxation:
    • LPs are pass-through entities, meaning profits flow through to partners based on ownership percentages.
    • General partners pay self-employment tax on their share of income, while limited partners typically do not, provided they remain passive investors.

Profit distribution in both entities is typically governed by internal agreements—an Operating Agreement for LLCs and a Partnership Agreement for LPs—but LLCs allow more customization and equitable profit allocations unrelated to ownership percentage.

Frequently Asked Questions

  1. What is the main difference between an LP and LLC?
    An LP has general and limited partners, while an LLC provides limited liability to all members and allows greater management flexibility.
  2. Can a limited partner manage an LP?
    No. Limited partners cannot participate in management without risking their limited liability status.
  3. Which is better for small businesses, an LP or an LLC?
    An LLC is typically better for small businesses due to its flexibility, limited liability for all owners, and simpler tax options.
  4. How are LPs and LLCs taxed differently?
    Both are pass-through entities by default, but LLCs can elect corporate taxation, while LPs cannot.
  5. Can an LP be converted to an LLC later?
    Yes, most states allow conversion from LP to LLC through a formal filing process with the Secretary of State, though this may incur fees and require new organizational documents.

If you need help with forming a new business, setting up a LLC or a LLP, or any other legal need, you can post your legal need (or post your job) 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.