Differences Between a Limited Partnership and an LLC

By Larissa Bodniowycz

Differences Between a Limited Partnership and an LLC

By Larissa Bodniowycz

Business owners have many options when deciding which type of entity their business should be. Having so many options can be beneficial, but it can also make it hard to decide which path to take—particularly when so much of the terminology sounds similar.

Two types of entities that confuse many business owners are limited partnerships (LPs) and limited liability companies (LLCs). Although there are similarities between the two, they are not the same, and understanding the differences can help an owner decide which is best for the business. Here are some of the most important differences between LPs and LLCs.

Degree of Limited Liability

As their names suggest, both LPs and LLCs limit owners' personal liability for business liabilities, but the degree of protection differs.

An LLC offers personal liability protection for all of its owners, called members, regardless of the degree of the member's involvement in the business operations. A member who runs the daily business operations receives as much protection from personal liability as a member who merely contributes funding to the LLC.

An LP, in contrast, offers personal liability protection for some of its owners. LPs must have at least one limited partner (another term for an LP owner) and one general partner, but only the limited partners receive personal liability protection. The general partners do not receive personal liability protection, making them personally liable for all business debts.

Management of Business

In an LLC, any owner can manage the business. For example, an LLC may choose to divide its members into managing members, responsible for the day-to-day operations of the LLC, and nonmanaging members, who have a more passive, investor-like role. There are many ways the LLC can choose to have the business managed, as it has a lot of flexibility in structuring the members' involvement in management of the business.

LPs lack this flexibility in structuring their operations. An LP's general partners are required to manage the company. Its limited partners, in exchange for their limited liability, cannot participate in the management of the partnership beyond financial contributions.

Taxation

An LP is a form of partnership and, as such, is always taxed as a partnership. That means that tax liabilities pass through to the individual partners, avoiding the double taxation associated with corporations. LPs have no flexibility when it comes to determining how they will be taxed.

LLCs, on the other hand, are neither partnerships nor corporations. They are usually taxed like partnerships, but they can elect to be taxed like corporations, if it suits their business needs.

Legal Uniformity

State law governs the creation and regulation of LPs and LLCs, so the laws that concern each vary by state. However, model sets of laws exist for both LLCs and LPs to try to increase uniformity.

Certainty Regarding Entity Issues

An LLC is a more commonly used business type than an LP, which has led to a deeper body of case law interpreting LLC laws. This means that there is generally more certainty regarding how the law will resolve issues related to LLCs. This greater degree of certainty helps LLC owners make better business decisions, because they are better able to predict outcomes.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.