An Overview of LPs vs. LLCs: Which Is Best?

Overview

If you're like many people, you may be considering forming a separate legal entity for your business to protect yourself and your personal assets. There are several different options, but two of the most common methods are forming a Limited Partnership (LP) or a Limited Liability Company (LLC).

Both types of business formation offer protection from personal liability and some additional tax benefits. However, there are some fundamental differences between the two options. There may also be some minor differences in how LPs and LLCs are formed and managed, depending on local and state laws. This guide covers the basics of LPs vs. LLCs so you can figure out which is the best option for your unique circumstances.

Basics of an LP

While an LLC can exist with a single member, an LP must have a minimum of two: at least one general partner and one or more limited partners. These two types of partners have different amounts of power, responsibility, and liability. General partners accept a larger share in the running of the company:

They have a say in management decisions.
They can participate in or oversee day-to-day operations of the business.
They assume complete (100%) personal liability for responsibilities, debts, and obligations related to the partnership.

On the other hand, limited partners have a smaller scope of authority and responsibility. In most cases, limited partners are simply investors in the company. They

Can provide capital contributions to the partnership
Do not participate in management or daily operations
Accept no personal liability for debts and obligations related to the partnership
Earn a share of the profits in accordance with their investments

Limited partnerships can provide many benefits for certain business models, especially in terms of raising funds. You may find more investors who are willing to contribute because they don't incur personal liability. Additionally, you and your general partners can manage the partnership efficiently without having to involve limited partners in daily operational decisions. LPs can also allow for tax deductions, although the exact nature of tax law varies between states.

Overview of an LLC

Comparing the details of LPs vs. LLCs may lead you to decide that forming a limited liability company is the best option for your business. In general, an LLC offers more flexibility than an LP. In an LLC, there can be many partners, and all of them may participate in the management of the company. When forming the LLC, you can outline specific responsibilities and rights for members in the Operating Agreement. You and your partners also have flexibility to create rules for distributing profits as you like; distribution doesn't have to correlate to each member's capital contribution.

One of the main differences between an LLC and LP relates to liability. In an LLC, all members are protected against personal liability for company debts. Like partnerships, LLCs offer several tax advantages, some of which can be especially useful for sole proprietorships.

Start Your Partnership Off Right With Expert Help

As you can see, learning the basics of LPs vs. LLCs can help you determine which one is right for you and your business. You may want to form an LP to maintain control of management decisions while encouraging investors to provide capital contributions. Alternatively, you and your partners may prefer the LLC model that provides everyone with liability protection and flexibility in terms of operational decisions and profit distribution.

No matter which way you decide to go, working with experts to form the legal entity for your business is essential. The trained staff at MyLLC.com has the knowledge to help you through every step of the process, including drafting and filing paperwork and providing services tailored to the legal specifics of each state and the District of Columbia. To get started, call 888-886-9552 or use the online contact form.

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