Comparison: LP and LLP

By Elizabeth Rayne

When forming a new business, it is important to select an appropriate business structure. You may consider a number of factors, such as the length of the business venture, the nature of the business and the level of involvement by the investors. Partnerships are a common option because they are relatively simple to set up and allow for a variety of management structures. A partnership may be formed as a general partnership, limited partnership or limited liability partnership.

General Partnerships

A general partnership is the most informal partnership structure. In many states, a general partnership is formed whenever two or more people start doing business together, and no formal registration is required. In a general partnership, the owners are personally liable for the debts of the business. Profits, liability and management responsibilities are shared equally among the partners unless otherwise specified in a partnership agreement.

Limited Partnerships

A limited partnership, or LP, is a more complex business structure. An LP is composed of general partners and limited partners. Limited partners are passive investors who may provide startup capital and receive profits from the business, but they do not have a say in how the partnership is managed. The general partners are responsible for making management decisions. An LP must have at least one general partner and one limited partner, and some states may limit how many limited partners an LP may have. General partners in an LP remain personally liable for the debts of the partnership, but limited partners are not liable. As a result, limited partners must be careful to not involve themselves in management decisions or they may be treated as general partners and will be liable for the debts of the business.

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Limited Liability Partnerships

In a limited liability partnership, or LLP, every partner may act as a general partner and a limited partner. All partners in an LLC are allowed to participate in the management of the business, and no partner is liable for its debts. LPs can be formed by anyone, but in many states, LLPs can only be formed by professionals, such as lawyers and doctors, to help limit malpractice liability.

Partnership Taxation

All partnerships are considered "pass through" entities by the Internal Revenue Service. This means that the partnership does not pay business taxes on its income; instead, the partners report the business income on their personal taxes. Depending on the type of partnership, the income may be treated differently by the IRS. General partners report partnership profits as earned income, while limited partners generally report profits as dividend income. Another important difference is that limited partnership interests are considered securities, which is not the case with a general partnership or LLP. As a result, different tax consequences may arise when selling an ownership interest as a limited or general partner.

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Difference Between LLC & LLP
 

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How to Convert a General to a Limited Partnership

A general partnership is a contractual agreement between two or more people or entities to conduct business together. Since each partner in a general partnership remains personally liable for all business obligations, the law does not require it to file a formation document that notifies the public of its status as an independent entity. A limited partnership allows some of the partners to enjoy limited liability, meaning their personal responsibility for business debts is limited to the amount of their investment. States that allow the formation of limited partnerships require them to register with the state by filing a certificate of limited partnership, so the public can identify the parties legally responsible for business activity.

Typical LLC Structures

Starting your own business involves choosing the right legal structure to operate it. A limited liability company, or LLC, is a type of legal structure that is right for many businesses because of its flexibility. Depending on your business needs, your LLC can be primarily structured around the number of owners, how it is to be managed and organized, or tax planning considerations.

How to Set Up a Partnership in Virginia

Partnerships are a common business type because they are relatively simple to set up and allow for flexibility in management structure. A general partnership is an agreement between two or more people to go into business together for profit. The partners remain personally liable for the debts and obligations of the business. Virginia partnerships are governed by state partnership law and by contractual agreements between the parties.

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