LLC vs Limited Partnership (What’s the Difference?)
Choosing between an LLC and a limited partnership comes down to one question: how much liability are you willing to carry, and who runs the show?
As a business consultant who has helped over 40 small business owners through entity formation in the past 9 years, I've seen founders make costly structural mistakes simply by picking the wrong entity for their situation.
In this article, I break down LLCs and limited partnerships across five key dimensions — formation, management, liability, documentation, and taxation — so you can make the right call before filing a single document.
Quick Summary
- An LLC provides personal liability protection to all its members, while the same security is only afforded to the limited partner in a partnership.
- Both entities benefit from pass-through taxation, but differ in terms of structure, formation, and legal compliance
- In 2022, U.S. partnerships filed more than 4.5 million tax returns—a slight bump of 0.7% from 2021. Limited partnerships made up just 9.6% of the total, but they raked in a whopping 35.4% of all the pass-through income, per IRS data [1].
- In my years in the industry, l've learned that both entities are ideal for small businesses, but an LLC offers more benefits.
LLC and Limited Partnership Compared
A limited liability company, or LLC, and a limited partnership are business structures ideal for small industries. While both benefit from pass-through taxation, they differ in terms of liability protection, structure, management and operation.
An LLC is a business structure that offers liability protection, single taxation and flexible management and operation procedures [2].
A limited partnership is a legal business arrangement between a general or managing partner and a limited partner or investor.
Key Differences
A limited liability company and limited partnership differ in terms of the following:
1. Formation and Structure
To form a limited liability company, you need to file Articles of Organization, appoint a registered agent, apply for an EIN, create an operating agreement, and obtain the necessary licenses and permits.
Depending on the state, an official publication might be required before you can operate your business legally. That's why I always advise clients to inquire with the Secretary of State to determine whether it applies to their location or not.
A partnership can be formed without formally filing the entity, but it cannot obtain legal benefits if it is not registered. If the parties in a partnership decide to register the firm, it would ensure legal compliance and credibility.
To form a partnership, you need to choose and register a partnership name or DBA, draft and sign a partnership agreement, and comply with tax and regulatory requirements.
2. Management
An LLC has the option to collectively manage the company or appoint members to run and manage the business. The company may opt to employ an independent individual or management service to oversee the LLC.
For clients new to the business, I recommend employing an LLC manager or professional service on the first year to familiarize yourself with the responsibilities of the position.
The general partner in a limited partnership assumes all managerial responsibilities, as well as running the day-to-day operations of the business entity. The limited partner acts as a passive investor with no administrative duties.
"A partnership is not a legal contract between two equal individuals. It’s an emotional alliance between two people committed to each other’s success."
- Warren Buffet, Investor & Philanthropist
3. Liability Protection
LLC members are provided with personal liability protection, in that, any debts, losses or other legal actions against the company are limited to the business entity. Banks and creditors may not pursue the personal assets of LLC members to settle claims.
In a limited partnership, personal liability protection is only extended to the limited or silent partner, and only the initial investment may be subject to loss. The general partner assumes personal liability for all debts, losses and legal actions against the business entity.
4. Documentation
An operating agreement is an internal document that outlines the by-laws of an LLC, which includes management, operations, ownership percentage, and the rights and responsibilities of the members.
The transfer of ownership, as well as the admission on new members are also indicated in the operating agreement.
A partnership agreement is a voluntary contract that defines the terms and conditions by which a limited partnership is managed and operated by the parties involved in the business.
It is executed with the understanding that there will be a sharing of the profits and losses among partners.
5. Taxation
An LLC is taxed as a pass-through entity by default, wherein the company itself does not pay taxes at the business level. The taxes are reported and paid on the member's individual returns [3].
Pass-through taxation is the default LLC tax treatment, and LLCs made up 72.7% of all partnership returns filed for Tax Year 2022 [4].
Members can choose to be taxed as a corporation. A client of mine was subjected to double taxation when she opted for a C corp tax status.
Partnerships also feature pass-through taxation. The business is not taxed at the corporate level, all profits and losses flow through the individual partners who pay on their annual tax return.
Related Articles:
- Difference Between a Partnership and an LLC
- Filing Taxes for a Partnership LLC
- Setting Up A Partnership LLC
What Are the Advantages and Disadvantages of an LLC?
Here are the benefits and disadvantages of an LLC to help you decide if it is the best option for your business.
Advantages:
- LLC members benefit from personal liability protection, wherein the assets of the company are separate from the finances and properties of the owners. While this is true, I emphasize the importance of opening a business bank account to legally separate personal finances from company assets and prevent piercing the corporate veil.
- Members are not subjected to double taxation.
- An LLC has a flexible management structure, since the members have the option to operate the company or appoint a professional service to run the LLC.
Disadvantages
- If an owner decides to leave or retire, the transfer of ownership should be agreed upon by all members.
- An LLC cannot exist perpetually like a corporation. Once the purpose of the business has been fulfilled, the members can voluntarily dissolve the LLC.
What Are the Advantages and Disadvantages of a Partnership?
A limited partnership offer the following pros and cons:
Advantages
- A prospective partner can help you raise capital to start a business.
- Limited partners benefit from personal liability protection.
- A partnership is relatively easy to establish since it has fewer formation requirements.
Disadvantages
- A limited partner cannot participate in the company's day-to-day operations and management decisions.
- A general partner does not benefit from limited liability protection.
Formation Costs by State
Formation costs vary widely by state in 2026 and differ between LLCs and limited partnerships.
LLC filing fees range from $35 (Kentucky) to $500 (Massachusetts), with annual fees up to $800 (California). LPs typically cost $50-$300 to register a Certificate of Limited Partnership, often slightly less than LLCs.
These upfront expenses highlight LLCs' broader appeal for simplicity, while LPs suit passive investors. Check your state's Secretary of State for exact fees.
FAQs
How Is Ownership Interest Determined in a Limited Partnership?
In a Limited Partnership, the ownership interest is determined based on the partnership agreement. Two common models for partnership agreement are used: the capital contribution model, which assigns ownership based on contributed funds, and the management model, which considers involvement in running the business.
Is a Limited Partnership the Same as a Limited Liability Partnership?
A Limited Partnership (LP) and a Limited Liability Partnership (LLP) are not the same. While an LP has general and limited partners with differing liabilities, an LLP provides limited personal liability for all partners, who can also actively participate in management.
Can a General Partner and a Limited Partner Be the Same Person?
A general partner and a limited partner can be the same person. If a limited partner becomes the manager, they automatically become a general partner as well, assuming both positions.
References:
- https://www.irs.gov/statistics/soi-tax-stats-soi-bulletin-fall-2024
- https://taxfoundation.org/tax-basics/pass-through-business/
- https://www.irs.gov/businesses/small-businesses-self-employed/limited-liability-company-llc
- https://www.irs.gov/statistics/soi-tax-stats-partnership-statistics
