Limited Partnership vs Limited Liability Company: What's The Difference?

Limited Partnership vs Limited Liability Company: What’s The Difference?

Entrepreneurs and startup business owners usually tend to want their business ventures to be legally compliant so that they may potentially gain credibility and recognition.

Although there may be numerous similarities between the concept of a limited liability company (LLC) and a limited partnership (LP) as business structures for startups and companies, there are also definite differences that business owners could potentially consider before making a decision. In keeping with Incorporation Rockets’ factual analysis of business compositions, it may be assumed that although there are several business structures available,  it is essential to take into account which type of structure is best suited for which kind of business in terms of personal liability and reputation.

Limited Partnerships 

Entrepreneurs who opt to form a limited partnership could factor in the point that limited partnerships require a formal startup process such as filing of formation documents and obtaining filing certification. Limited partnership business structure documentation appears to outline the roles of the partners and other necessary business aspects to deliberate. 

Limited partnerships may be described as one of the few among several popular American business entity kinds. This type of business structure is comprehensively formal since it requires registration with the Secretary of State. With the protocol and type of system that comes with limited partnerships, business owners often have the advantage of gaining some liability protection for themselves.

The business structure of limited partnerships is unique since it hosts two categories of partners, namely the limited partners and general partners. Limited partners may potentially be considered as passive investors since they do not make active daily decisions when it comes to the running of the company or management rulings since their primary function is to contribute capital to the business. Handling the matter of managing day-to-day affairs falls into the responsibility of general partners. 

General partners’ central focus is to aid the succession of the company by taking an active role in the managerial aspects of the business; however, like limited partners, they may invest some capital when initially starting the business. General partners usually tend to assume more roles in the involvement of decisions that include contracting agreements, employee management, and daily task oversight. 

Limited Liability Company 

Limited liability companies (LLCs) could be acknowledged as an attainable structure for business owners and startup entrepreneurs looking to launch a formal business entity type that combines components of a corporation with features of sole proprietorships or general partnerships. 

A limited liability company has the potential capacity to perform fundamental business duties, which may include activities of buying property and hiring employees. An LLC business structure may potentially provide personal asset protection, which may be explained as to whether the business falls into debt or a matter of being legally compromised; the business owner’s assets in question may not be obtained as compensation.  Based on substantial research, it may be assumed that an LLC business structure holds owners as “members” instead of partners by which each member may or may not have the same percentage of business ownership, however in some cases, it is possible for an LLC business to be owned by one single business owner. 

The Difference between Limited Partnerships and Limited Liability Companies

As indicated, both limited partnerships (LP) and limited liability companies (LLC) have different business structures that are composed of several elements and features. LPs are formed with general partners and limited partners, which both have different roles to play within the formation of an establishment. In contrast, limited liability companies often may be capable of having as many owners as required. Business owners in limited liability companies may potentially be referred to as “members,” and their rights and responsibilities are not set but may be defined within an outlined operating agreement. Limited partnerships entail the feature of limited partners being capable of capital and investment and general partners being in charge of day-to-day activities, whereas an LLC operating agreement has the possibility of allowing all members to participate in business management and daily duties. 

Another critical difference between venturing into a limited partnership or limited liability company is the different types of personal liability that come with each structure. In a limited partnership, a limited partner may not have personal liability for partnership obligations and may only be responsible for the financial aid he has invested into the business. In contrast, general partners in this business structure have unlimited personal liability for future debts and obligations of the company and may essentially be personally held liable. LLCs are unalike LPs, and each participant may be granted no personal responsibility for the company’s liabilities.