Last updated: November 30, 2022

Limited liability companies and limited partnerships are two types of business entities that might seem appealing to most business owners.

Not only are these business entities flexible, but they also offer their owners limited personal liability.

This article will compare and contrast LLCs and limited partnerships, and it will ultimately help you in deciding which business entity is best for your company.

What is an LLC?

A person asking about what is an LLC

A limited liability company (LLC) is a business structure that offers the benefit of limited liability to its owners, with an added benefit of pass-through taxation.

This means that LLC profits are not taxed at the business level but instead are "passed through" to the individual LLC members, who report them on their personal income tax returns.

LLCs can be owned by one person (a "single-member LLC") or two or more members (a "multiple-member LLC"). LLCs can be taxed as a corporation, an S Corporation, and/or a partnership.

LLCs are popular business structures because they offer the limited liability protection of a corporation and the pass-through taxation of a partnership.

Personal liability protection is one of the primary benefits of LLCs. This means that the owner's personal assets are generally protected in the event that the LLC is sued.

What Is a Limited Partnership?

A limited partnership represents a business entity that is often used for real estate investments and has become very popular among investors due to the limited liability it provides its partners.

A limited partnership is a business structure that offers some, but not all, of the same benefits as an LLC. Limited partnerships offer pass-through taxation, limited liability for the partners, and restrictions on who can partner.

A critical difference between LLCs and limited partnerships is that LLCs are allowed to have an unlimited number of members, while limited partnerships are only allowed to have one general partner and any number of limited partners.

The general partner is in charge of the management of the business and is liable for any debts the business incurs.

The limited partners don't take part in the management of the business and day-to-day operations and are only responsible for up to the amount they have invested in the partnership.

In a limited partnership, partners have an obligation of good faith and fair dealing with each other when it comes to management decisions made by the general partner.

Unlike LLCs, this allows members more autonomy in making business decisions if so specified in the operating agreement.

LLC Taxation

A visual graph and calculator computing taxes

LLC provides unlimited personal liability to its owners but implies that the business is separate from its owners. That means that the tax obligations of an LLC and its owners are separated.

LLC owners report their taxes on their personal tax returns, and the LLC itself doesn't pay any taxes.

This includes self-employment taxes and employment taxes for LLC owners, who are often different from business employees.

The biggest tax advantage of limited liability companies is that their income is taxed at the owner's individual tax rate.

This can be a significant saving since LLCs are pass-through entities and don't pay corporate taxes unless they choose a corporate tax treatment (C or S corporation).

Limited Partnership Taxation

The Internal Revenue Service doesn't distinguish between an LLC and an LP by default. In fact, multi-member LLCs are taxed as partnerships by default.

However, LLCs can elect corporate taxation upon formation, whereas LPs cannot. Corporate taxation is more complex and comes with its own set of rules, so it's crucial to weigh the pros and cons before making a decision.

Generally speaking, LPs are more straightforward to operate than LLCs but offer less tax flexibility. LLCs are more complex to operate but can make tax management easier in some cases.

The key is to select the business entity that offers you the best balance between simplicity and flexibility, depending on your unique situation. Don't forget about state filing requirements as well.

It would be best if you also considered how many owners an LLC or LP has before deciding. Multi-member LLCs are taxed as partnerships, whereas LPs cannot have more than one general partner or a limited number of special partners.

It would help if you made the right decision when choosing between an LLC and an LP because it can impact your business in many ways down the road.

Characteristics of a Limited Liability Company

In the middle of the meeting where a young manager explaining to his older co-leagues

Members of an LLC can be individuals, corporations, other LLCs, or partnerships.

An LLC can be manager-managed or member-managed; this means that unless the members agree to the contrary in the company's operating agreement, it will be managed by its members who will be in charge of business operations and the company's financial obligations.

The manager of an LLC is usually appointed by the members and can be one of them or someone outside the company.

The Articles of Organization and the operating agreement are two governing legal documents that are the primary sources of LLC rules and regulations.

The operating agreement determines how business is to be conducted, while the Articles of Organization specify the details about the business entity.

Characteristics of a Limited Partnership

Limited partnerships generally allow two types of partners: limited partners and general partners.

General Partners are the managers of the LP, control its operations, assume unlimited liability for all partnership debts or obligations (i.e., management is at-will), receive more than half the profits of the LP, can participate in managing its affairs on a day-to-day basis if they wish to do so, must contribute capital to the partnership when it is formed (in most cases), are held personally liable for all debts or obligations of the LP not paid from partnership assets and have no right under state law to limit their individual liability.

Limited partners generally do not manage operations, assume only limited liabilities associated with their investment in an LLC (i.e., management is at-will), receive only a portion of the profits, cannot participate in managing its affairs on a day-to-day basis if they wish to do so, are not liable for debts or obligations of the LLC not paid from partnership assets and can limit their liability by complying with specific statutory conditions.

A limited partner may also be referred to as a "silent partner" or "investor" and generally must contribute a minimum amount of capital.

General Partners may also be referred to as "managing partners," responsible parties," "managers," or "sponsors."

The governing document of a limited partnership is a partnership agreement that specifies the rights and obligations of the partners.


How Is Ownership Interest Determined in a Limited Partnership?

A general partnership is organized so that the capital percentage of each partner is equal to the percentage of ownership interest they hold in the company. Limited partnerships are not so straightforward.

The partnership agreement will outline how ownership is determined between general and limited partners, but typically it follows one of two models.

The capital contribution model looks at who has contributed money to the partnership and assigns an ownership interest based on that contribution.

The management model looks at who is running the business and assigns an ownership interest based on that involvement.

Is a Limited Partnership the Same as a Limited Liability Partnership?

No. A limited partnership is a type of business entity that offers some benefits to both partnerships and corporations.

A limited liability partnership (LLP) is a specific type of partnership in which all partners have limited personal liability for the business's debts and obligations of the LLP.

The default rule is that each partner in an LLP has joint liability with the other partners for all debts and obligations of the LLP.

LLP's partners can take part in management and business operations, unlike those belonging to an LP.

Can an LP Be a Corporation?

LPs can't be taxed as corporations, unlike LLCs. However, a corporation can be a partner in limited and general partnerships.

Can a General Partner and a Limited Partner Be the Same Person?

No, according to the IRS. However, suppose partners within limited partnerships agree that one of them is going to become the manager.

In that case, that persona will automatically become the general partners, which means they will be holding two roles within a company.

Are Limited Partners Liable for Debts?

No, a limited partner is not held personally responsible for the company's debts because they are not in charge of business assets, management of the LP, or any other business organization matters.

Can a Limited Partnership Have an EIN?

Yes. In fact, LPs and LLCs all need an employer identification number because it is necessary to open bank accounts, hire employees, and file taxes.


LLCs and LPs both have their benefits and drawbacks.

If you are not sure about opening an LLC or an LP, make sure to consult with a tax professional, attorney, or law firm that can provide you with legal advice on how to form your company in the most appropriate way possible.

Do some research into what other people who have started a similar type of business recommend before making any decisions.

About The Author

You May Also Like

Leave a Reply

Your email address will not be published. Required fields are marked *