Difference Between LTD Partnership & LLC

By Joe Stone

A limited partnership and limited liability company are both types of business entities formed under state law. They are similar in structure due to the fact that limited liability companies, or LLCs, are designed to combine the benefits of both partnerships and corporations. However, there are important differences between the two business entities.

A limited partnership and limited liability company are both types of business entities formed under state law. They are similar in structure due to the fact that limited liability companies, or LLCs, are designed to combine the benefits of both partnerships and corporations. However, there are important differences between the two business entities.

Personal Liability Protection

An important reason why business owners form an LLC or limited partnership is to protect their personal assets from business-related liabilities. For an LLC, all the owners -- called members -- receive this liability protection. However, the owners of a limited partnership are not treated the same in this regard. A limited partnership is required to have at least one general partner and one limited partner. Although the limited partner receives liability protection, the general partner does not -- he will be personally liable for the partnership’s obligations.

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Participation in Business Activity

The owners of an LLC can choose to have each member participate in the management of the business or designate the management responsibilities to one manager or managers. In either case, each member receives the same liability protection regardless of his level of participation in the LLC's business activities. This is not the case with a limited partnership. In order to maintain liability protection, a limited partner cannot participate in the partnership's business activity. If such activity occurs, the limited partner may become exposed to personal liability for the partnership's obligations.

Tax Treatment

The benefit of forming a limited partnership is for the pass-through tax treatment; that is the partnership is not taxed and the profits and losses of the partnership are shared among the partners and taxed only once. An LLC is similar in that it is often formed by business owners for the same tax benefit. However, for federal tax purposes, an LLC is treated as a disregarded entity. This means that, unlike a limited partnership, the members of the LLC can be choose to be taxed as a corporation rather than a partnership if that better suits the needs of the business.

Case Law Differences

Limited partnerships have a much longer legal history than LLCs, with most state LLC statutes having only been enacted since the early 1990s. This creates a significant difference between the case law that has developed regarding the judicial interpretation of limited partnership law versus the development of LLC case law. Some uncertainty still exists regarding the extent to which principles of corporate law may be applied to LLCs that could impact important aspects, such as the member’s expectation of liability protection. For LLC members, such issues will not be settled until there is sufficient case law interpreting LLC statutes.

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Asset Protection in a Limited Partnership

References

Related articles

Is a Limited Liability Company a Partership?

A limited liability company, or LLC, is not a partnership. LLCs and partnerships are two separate and distinct legal entities that business owners can use to structure their businesses. However, an LLC with more than one owner does have some of the same characteristics as a partnership. LLCs were developed to combine the benefits of both a corporation and partnership.

Dissolving Limited Partnerships

The laws of each state govern the creation and dissolution requirements of limited partnerships that operate within its jurisdiction. However, 18 states and the District of Columbia follow the Uniform Limited Partnership Act of 2001, thereby creating some uniformity in partnership dissolution rules. If the limited partnership you’re dissolving operates in a different state, the rules are fairly similar but differences may exist. Be sure to research the laws of your own state.

Comparison of LLC & Corporations

An LLC and a corporation are two types of legal entities that can be chosen to structure a business. Both LLCs and corporations are created under state law, with each state’s requirements varying to some degree. Because the primary purpose of enacting LLC laws was to create a legal entity that combines the advantages of incorporating a business with the advantages of operating a business as a partnership, LLCs and corporations share similar traits, as well as differences. A comparison of these similarities and differences can help a business owner choose one structure over the other.

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