LP vs LLC: Everything You Need to Know
If determining whether to establish an LP vs. LLC, you will want to be mindful of the benefits and potential disadvantages of operating both types of business structures.3 min read
2. LLC Advantages
3. Advantages of a LP
4. Differences Between LP and LLC
Updated October 30, 2020:
LP vs LLC
In determining whether to establish an LP vs. LLC, you will want to be mindful of the benefits and potential disadvantages of operating both types of business structures. An LP, also referred to as a limited partnership, consists of limited partners, which is unlike the general partnership that consists of general partners. An LLC, or limited liability company, consists of members (owners).
There are many advantages to forming an LLC, including business and tax advantages. First and foremost, it is very easy to form an LLC. You can do so by filing the Articles of Organization with the Secretary of State’s Office in the state you plan on registering. While there are other requirements, i.e. choosing your business name, finding a registered agent, obtaining an employer identification number (EIN), opening a business bank account, etc., the main document you need to file your LLC is the Articles of Organization, which is a simple and straightforward document. It is also cheap to form an LLC. Generally, most states charge no more than $100 to register your LLC.
Owners of the LLC, also referred to as members, can choose to manage the LLC themselves or designate a third-party manager to manage the business. Most states allow the LLC members to choose one designated member to operate as the manager. LLCs can have as many members as they want; corporations can even act as members of an LLC.
One tax advantage is that an LLC operates as a pass-through entity. The LLC itself doesn’t pay taxes but rather passes the profits and losses to the members who then report it on their personal tax returns.
If you choose to operate a single-member LLC, you will still enjoy limited liability. With regard to taxes for single-member LLC, you can choose to pay taxes as a sole proprietorship or corporation. Taxes for multi-member LLCs are usually taxed similar to either a partnership or corporation, depending on what the LLC members choose.
Advantages of a LP
There are also many advantages to operating a limited partnership, including:
• Limited liability
• Pass-through tax treatment
• Certain business deductions
• Indefinite life
Similar to an LLC, limited partners also enjoy limited liability in terms of the limited partnership’s debts and obligations. Furthermore, with regard to tax treatment, LPs also operate as pass-through tax entities, meaning that the limited partnership avoids double taxation.
Limited partnerships have additional tax benefits. For example, a single-person LP can deduct health insurance and entertainment-related expenses. If the limited partnership has a general partner, that partner can also deduct pension plan and 401(k) expenses.
Another benefit of the LP is that it can last forever. This is not the case for LLCs. If a member of an LLC dies, then the LLC is dissolved. Similarly, if a member no longer wishes to participate in the LLC, then the LLC will no longer be able to conduct business.
Differences Between LP and LLC
In a limited partnership, limited partners can invest in the business and share the profits and losses, but cannot actively manage the daily operations of the LP. However, in an LLC, the members can in fact oversee the daily operations of the business so long as the LLC is member-managed and not manager-managed. The rights and responsibilities of the members are identified in the LLC Operating Agreement.
One of the main differences between the LP and LLC is liability. In a limited partnership, there will be one or more general partners who are in charge of the daily operations of the business. Such general partners will have unlimited personal liability for any debts and obligations of that limited partnership. However, a limited partner generally doesn’t have personal liability but also doesn’t have any oversight on the company’s operations. The LLC doesn’t operate in this way. Regardless of how much oversight the LLC member has, he or she cannot be held personally liable for the LLC’s debts and losses. Therefore, if your LLC is sued, the plaintiff cannot come after your personal assets, i.e. home, car, bank accounts, etc.
If you need help forming your LP or LLC, you can post your legal need 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.