How to Compare an LP & an LLC

By Lauren Miller

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.

Comparing Features

Step 1

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.

Step 2

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.

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Step 3

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).

Step 4

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).

Step 5

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).

Step 6

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.

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Which Is Better: an LLC or an LLP?

References

Resources

Related articles

What Is a Dual Class LLC?

A limited liability company is a hybrid entity that has the qualities of both a partnership and corporation. Depending on the number of owners, an LLC can be taxed as a partnership, corporation or sole proprietorship. A dual class LLC is a special type of LLC that minimizes self-employment tax and is analogous to a limited partnership.

How to Add a Nonvoting Investor to an LLC

Adding a nonvoting member to your limited liability company may be an opportunity to bring in more investors while maintaining control over your business. An LLC is a business that provides the limited liability of a corporation, with the management structure of a partnership. The state law where your LLC is located will determine how the company is formed, and how the LLC may be managed. State laws may be similar, but some states do not allow for nonvoting members.

Can an LLC Operating Agreement Be Amended?

The operating agreement of a limited liability company sets the guidelines and regulations for the company's business functions and structure. The agreement is typically prepared by the founding owner or owners, referred to as members, and kept by the LLC. An operating agreement is a legally binding document once signed by LLC's members, functioning as a contract. The agreement may be amended by the members if changes are needed.

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