Limited Partnership vs LLC: Which One is Right for Me?

by ExpertEntrepreneur

Are you forming a business? The most important step is choosing the right type of business. Here's a look at LLCs and limited partnerships, the most common choices.

If you're thinking about starting a business, or you're ready to incorporate, you may be wondering: which business type is best for me? Over the past few years, more options have opened up for business owners, including formation options like limited parterships and limited liability corporations, or LLCs. These are now two of the most popular entities because they come with many advantages. It's even possible to merge the two.

If you're trying to decide which of these two options is best for your business, let's review them together.

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What is a Limited Partnership?

A limited partnership, or LP, has both general partners and limited partners. The general partners are involved in the management of the business and they have complete liability for all obligations of the partnership. Limited partners, on the other hand, may not participate in any management and they therefore have no liability beyond the money they contribute. They are protected against the partnership's debts as well as obligations, although they can still receive a portion of profits.

An LP is usually chosen because it's very attractive to investors who do not want to participate in the business itself. As a business owner, you may find this option attractive if you want to raise funds without involving anyone else in the management of your business.

What is an LLC?

An LLC is best seen as a hybrid type of company as it combines the advantages of a sole proprietorship, a partnership and a corporation. Owners, or members, of an LLC enjoy limited liability, just like a corporation's stockholder. Anyone can own an LLC, including trusts, corporations and individuals. They're also very flexible with no limit on the number of owners and no strict formalities.

Unlike a corporation, a limited liability corporation does not need to observe formalities like director meetings and annual reports. You can also distribute the profits however you like, unlike a limited partnership or a corporation. This means you can allocate 20% of the profits to an owner who does little of the management work, even if they contributed a greater share of capital.

Pros of Forming an LLC

  • Personal liability is limited. The debt and obligations of the business because the responsibility of the business, a separate legal entity. If the business is sued, your personal assets are protected.
  • No double taxation. Unlike a corporation, which pays tax first as business income and then when dividends on distributed, an LLC has a very favorable tax treatment by the IRS.
  • No limit on the amount of owners. You can have as many owners as you wish.
  • Simple structure. With an LLC, you gain a great deal of flexibility and you can operate with a member-managed or a manager-managed busines structure. There is no need to set up a board of directors, file annual reports or keep careful records.
  • Set membership classes when issuing stock. If you decide to issue stock in the future, you can choose to issue stock with membership classes.

Pros of Forming a Limited Partnership

  • Easy to gain investors. Investors are more attracted to a limited partnership over an LLC and you'll find it's easy to generate capital by adding new limited partners to your business.
  • Absolute oversight. The limited partners in your business do not manage the business or gain voting power so the general partners maintain complete control of the management.
  • Tax structure. Your income won't be taxed at the business level. Instead, profits and losses are passed through to the general partners and reported on personal income taxes.
  • Liability protection. The limited partners of the business have complete personal liability protection up to the amount of their investment.


Choosing the right business type is the most important step you can take when you form or incorporate your business. It has major ramifications on taxes, liability and business management, so it's best to consult with a corporation service company like USA Corporate Services to gain more insight and choose the structure that will offer you the most benefit.

Updated: 12/17/2012, ExpertEntrepreneur
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