LLC versus LP: Which is Best for You?

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Written by: LLCStars Team
Read 7 minLast updated on

Starting a business today is fairly easy, and you can choose from numerous management structures, depending on your niche.

The best way to learn which structure will work best for you is to compare it. 

For example, this guide compares an LP (Limited Partnership) and LLC (Limited Liability Company). Both of them have limited liability but are totally different business structures.

Continue reading this LLC versus LP review to learn which management structure is perfect for your business.

The Similarities Between LLC versus LP

First, let’s discuss the similarities between these two business structures.

So, a limited partnership, or LP, operates under the unbalanced partnership model and requires at least two owners: one is known as a general partner, and the other is a limited partner.

A Limited Liability Company, or LLC, can be formed by a single person or a group, and these people are called Owners or Members. LLC management, shares, voter’s rights, and the responsibilities of each member are described in the Operating Agreement.

You can see that LLC and LP are two different business entities, but they do share a couple of similarities:

  • Pass-through taxation model. Both LLC and LP are eligible for pass-through taxation, which means that their owner will pay individual income taxes, not the corporate income taxes like the traditional C-corps. So you won’t get double taxation but will be responsible for providing the state with annual tax reports.
  • Flexible management. If you compare LLC versus LP to the traditional corporation, you will see that the latter is much less flexible in management or ownership. LLC or LP allows you to distribute the responsibilities among the owners more precisely and adjust your company’s framework as you go.
  • Easy formation. Both LP and LLC require minimum paperwork to get started. For an LLC, you need a Certificate of Organization and Operating Agreement. For an LP, you need a Partnership Agreement to register your business with the state and pay a state fee. You will also need an Employee Identification Number (EIN) for both LLC and LP to open a bank account and a registered agent service to keep the business correspondence apart from your personal. You can check our selection of the best registered agent services on the market and pick one for yourself.

The differences Between Limited Partnership vs. LLC

Now, let’s outline the main differences between a limited partnership and a limited liability company.

Management Structure

Both LLC and LP are great for their flexibility, but this flexibility is achieved with different management structures. 

For an LLC, the management roles are thoroughly described in the Operating Agreement. This document outlines a few important things:

  • each member’s percentage of ownership, typically assigned proportionally to the invested funds;
  • the management structure of the LLC: member-managed or manager-managed;
  • the responsibilities of each member of the operational board;
  • the algorithm for solving disputes and voting for decisions;
  • the information about your business: name, address, registered agent address & contacts;
  • the algorithm for business dissolution;
  • the algorithm for ownership redistribution if one of the members wants to exit the business or dies.

Once you compose your operating agreement, you will have a draft for any operation within your company.

A limited partnership should have at least one ‘general’ partner, and one ‘limited’ partner. 

General partners are those who manage the company and make business decisions. They are also the ones who face unlimited liability in case of legal and financial debts. 

Limited partners, on the other hand, are passive investors that invest money or property. They aren’t in control of the business and have personal liability protection.

The Applications of Liability

Although both business structures limit the owners’ liability, they go about it in very different ways. 

LLC protects your assets in case of any legal repercussions, so if your company gets a lawsuit, it won’t affect your property or finances. 

Limited partnership grants limited liability only to limited partners, and this liability includes primarily the amount of investments and obligations held. The majority of control over the LP stays in the hands of the general partner, and they will take on full responsibility, including financial, should the company have any legal problems.

Popularity

The final difference between LLC versus LP is that the latter is much less popular.  An LLC is a more appealing business entity to entrepreneurs, especially those who have only started their business, because of the protection of personal assets. 

However, the majority of the best-rated LLC formation services can help you start both LLC and LP.

Who Will Benefit Most from an LLC?

The main thing you need to consider when comparing LLC versus LP is that different business structures are built for different purposes. 

So, who will more likely benefit from an LLC?

  • Those who need liability protection. Although an LP grants liability protection to its limited partners, sometimes that’s not enough. If you want all business owners — including yourself — to enjoy liability protection, then an LLC is a better way to manage your business.
  • Those who want to start a business by themselves. You can be a single owner of the company and deal with all responsibilities, such as finding vendors, managing taxes, and running the business. That’s why an LLC is a go-to way to form start-up companies and small businesses.
  • Those who need more management flexibility. You can manage your LLC from the operational board and delegate some responsibilities to other owners. Or, you can appoint a manager to different departments and work only as a supervisor, which is especially great for actively growing companies.

Who Will Benefit Most from LP?

Here are some situations, opening a limited partnership could work better:

  • If you want to attract investors. In a limited partnership you need at least one general partner, and one limited partner, whose primary responsibilities will be investing money or property. So, if you want to attract more passive investors, opening a limited partnership is a great choice.
  • If you want some tax-deductible services. The pass-through model allows limited partnerships to avoid double taxation and pay fewer income taxes than a corporation, attracting more investors.
  • If you already have an LLC. You can include your LLC as a general partner and get even more flexibility in managing your business. Plus, if you form an LLC yourself, you can also have personal liability protection and keep your assets separated from the business finances or legal repercussions.

FAQ

Which is better for a new business: an LLC or an LP?

They are both great, just for different types of businesses. An LLC allows you to jumpstart your company and can be managed single-handedly, which is why it’s a good business structure for start-ups, IT companies, or small businesses. On the other hand, LP works well if you have someone to invest in your business or know how to attract vendors. The best examples would be real estate agencies, service industries, or law firms.

Conclusion

Both LLC and LP are excellent choices for those who start their first company, and knowing the main differences between them will help you pick the proper business structure for your niche. If you have a trusted partner or a relative who can invest, opening an LP is the way to go. If you want to delegate tasks, have more flexible management, and keep your assets protected, choose an LLC.

What do you think? Which business structure seems the best fit for your company? Let us know!

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