Limited Partnership vs Limited Liability Company: What’s the Difference?

There are a number of similarities between a Limited Partnership vs Limited Liability Company, such as flexibility and pass-through tax treatment.

There are also some distinct differences to consider when comparing Limited Partnership(LP) vs Limited Liability Company(LLC) and choosing which would be the best in your circumstance: structure, personal liability, and reputation.

Limited Partnership(LP) vs Limited Liability Company(LLC): The Similarities

1. Flexibility

   Organizers of LLCs and LPs are offered flexibility in how they define the rights and responsibilities of the entity’s members or partners, along with how the entity is structured. These issues are specified via the Operating Agreement (LLCs) or Limited Partnership Agreement (LPs); both of these are internal agreements that remain in force up until amended or changed by unanimous approval of all company members or partners.

   For example, investors in an LLC or limited partnership can attend to whatever voting or economic terms they want and can modify the standard of care and fiduciary duties which individuals in business owe to one another.

   Some State’s laws provide specific limited default terms that will govern in case the operating agreement of the entity is silent on a problem, but the LLC and limited partnership forms are each intended to give maximum effect to the individuals’ liberty to contractually provide for terms they deem appropriate.

2. Pass-through tax treatment

   Pass-through tax treatment, typical to both LLCs and LPs, usually means that the business itself is not subject to federal income tax. However, each investor will frequently be required to report his/her share of the business’s income, gain, loss, and deduction. To learn more on pass-through tax treatment, please consult with an accountant or tax professional.

   

Limited Partnership vs Limited Liability Company:

The Differences

1. Structure

   A limited partnership is made up of general partners and limited partners. Limited partners can invest in the business and share its profits or loss, however can not be active participants in the daily operations of the business.

   A limited liability business can have as numerous owners (called members) as it would like. The rights and responsibilities of an LLC’s members are described in the LLC’s Operating Agreement. Unless the Operating Agreement states otherwise, all members have the right to take part in the business management

2. Personal liability

   The most essential distinction between the LLC and LP relates to the personal liability of the participants. A limited partnership is managed by one or several general partners who control the day-to-day operations of the business.

   These general partners have endless personal liability for the debts and obligations of the limited partnership, suggesting they can be held personally accountable for those debts and responsibilities.

   A limited partner generally does not have personal liability for partnership obligations however is not allowed to participate in the day-to-day management of the limited partnership.

   To prevent the personal liability of a general partner, an entity such as an LLC is often developed to function as the general partner of a limited partnership.

   The LLC was developed to provide the flexibility of a partnership while providing corporation-like protection against individual liability. One or more of its members can manage an LLC, in the very same way, that a general partner might in an LP, however each member’s role can be defined differently in the LLC’s Operating Agreement.

   Unlike in a limited partnership, however, a participant engaged in the management of the business is normally not held personally liable for the liabilities of the entity.

   As a result, if your LLC is associated with a suit, your home, vehicles, and personal bank account are not generally considered at risk for the LLC’s obligations.

3. Popularity

   The LLC is without a doubt the most popular kind of entity.  As an example, in 2019, 73% of the state of Delaware’s new formations were LLCs, while only approximately 6% were LPs.

If you have any questions about Limited Partnership vs Limited Liability Company, please call 509-543-7600 or send a request HERE.

November 2021

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