One of the biggest decisions involved in starting a business is deciding on a business structure. Limited liability companies, or LLCs, and limited partnerships, or LPs, share similar characteristics and may be attractive to some business owners. Comparing features of the two types of business structures can help you decide which one best suits your needs. Both LLCs and LPs are entities separate from their owners.
Decide on what type of management you would prefer for your business. An LLC can be made up of one or more owners called members. In some states, a member can be another LLC or other type of business entity. Members can designate one or more managers from amongst themselves to make decisions on behalf of the business, or can run the business themselves. Consequently, LLCs can be member-managed or manager-managed.
Identify and make a list of potential partners for an LP if you do not want the membership structure of an LLC. LPs are made up of two or more individuals who share ownership of one company. There are two types of owners in an LP. A general partner manages the company. A limited partner has little or no management responsibility.
Create a list of the registration fees and types of documents required to start an LLC and LP in your state. Business.gov has a list of links to state corporate offices all over the nation. Each state site has a fee schedule and information on the documents required to start a business. Fees vary from state to state from less than $100 to as much as three or hundred dollars for a single document filing. Business.gov has a clickable map linking to state government business offices in all states, Puerto Rico, the U.S. Virgin Islands and Guam (see Resources).
Create a sample operating agreement for an LLC and a partnership agreement for an LP. This may help you decide what type of structure is most appropriate for how you plan to run your company. Agreements for LLCs and LPs include information such as how profits are allocated, the rights of members or partners, how disagreements are resolved and ownership percentages. An agreement for LLCs and LPs may also dictate how ownership is transferred among members or partners. The Citizen Media Law Project at Harvard University provides samples of agreements for LLCs and LPs (see Resources).
Create a list of the taxation options of LLCs and LPs. LLCs and LPs are taxed in different ways. LLCs have more taxation options than LPs. There is no federal tax classification for LLCs. Members choose to have the company taxed as a partnership or a sole proprietorship. In an LP, partners are taxed based on the share of each individual’s income from the company. The Internal Revenue Services publishes guidelines on taxation options for LLCs and LPs (see Resources).
Compare the liability characteristics of LLCs and LPs. In an LLC, members are protected from being personally liable for the debts and obligations of the company. In an LP, general partners are held liable for company obligations. The liability of limited partners is restricted to the extent of their contribution to the company.