When considering business structures, two common options are Limited Partnerships (LP) and Limited Liability Partnerships (LLP). While both offer certain advantages in terms of liability protection and management, they have distinct features that make them suitable for different situations. Here, we delve into the key differences between LPs and LLPs to help you understand their unique characteristics. Although many business professionals appreciate partnerships for their flexibility and simplicity, many are worried about the fact that participants are individually liable for the partnership’s debts. Business models like Limited Liability Partnerships and Limited Partnerships are created to allay this issue.
Partners can be shielded from personal responsibilities in both limited partnerships and limited liability partnerships while still having pass-through taxes and the flexibility of a general partnership. Limited Partnerships and Limited Liability Partnerships are essentially the same thing, and these kinds of partnerships are better suited for those who work in related professions, such as legal firms or accounting firms.
What Is a Limited Partnership?
An LP is a kind of partnership with two categories of participants: general partners and limited partners. Every LP shall have a minimum of one General Partner and one Minimum Limited Partner. Operation of the LP is overseen by the general partner. Additionally, general partners are liable on an individual basis for the LP’s debts. The partnership agreement specifies and agrees upon their respective rights to their share of the earnings. Like general partners in a general partnership, they play the same job. Natural or legal individuals or entities may be general partners. Due to the security it offers against personal responsibility, businesses frequently choose an LLC or a corporation as the general partner of the LP.
Limited partners, on the other hand, simply make a monetary commitment in the company. Although they are protected from personal obligations, individuals risk losing their money invested in the LP. Limited partners have no voting rights and no influence over how the LP is run. Similar to a dividend paid to corporate owners, limited partners are compensated for their financial contribution. If it is discovered that a limited partner is actively managing the company, they risk losing their position as limited partners and being held personally liable for any corporate debts. Unlike general partners, limited partners are exempt from paying self-employment tax.
What Is a Limited Liability Partnership?
In an LLP, all partners have certain restrictions on their liability. All partners are permitted to participate in LLP management. The Limited Liability Partnership Agreement can be read to find a detailed description of the operating methods. Profit distribution is also open to change.
Professional service companies including legal firms, accountancy firms, and financial service companies frequently favour LLPs. This is so because LLP partners are not accountable for allegations of negligence or misconduct brought against other LLP partners. Some states specifically forbid licenced professionals from forming an LLC because of this. Some states, even those that do enable this, only let specific kinds of professionals pick the LLP structure.
An LLP’s flexibility in management enables founding members to retain control of the company without having to delegate too much decision-making authority to less experienced partners. An LLP could be charged state franchise tax, in contrast to a general partnership.
Differences Between a Limited Partnership (LP) and a Limited Liability Partnership (LLP)
1. History: The 1970s and 1980s saw a rise in the popularity of limited partnerships. For short-term endeavours like films and other ventures, many business owners today use limited partnerships. Compared to limited partnerships, limited liability partnerships are a recent development. LLPs gained popularity in the 1990s, about the same time as business owners began to favour limited liability companies as a form of organisation.
2. Structure: Both LP and LLP have several organisational structures. In contrast to the creation of an LLP, which requires at least two general partners, an LP can be formed with just one general partner. General partners and limited partners are the two categories of owners in an LP; there may be one or more general partners or one or more limited partners. General partners in an LP decide on daily operations and business decisions.
Limited partners are essentially business owners that commit cash in exchange for a portion of the company’s profits.
They are the ones that invest money, assets, or time in the firm, but in an LLP there is only one sort of owner, namely General Partners. In an LLP, each partner participates in business operations and decisions and splits profits and losses.
3. Differences in Liability Protection
If your business is a limited partnership, the general partner’s liability for company losses and debts is limitless, but the limited partner’s liability is constrained. This implies that due to losses and commitments incurred as a consequence of running the firm, the general partner may lose his house and other personal assets. Limited partners are protected from the duties and debts of the firm by their own assets.
All partners in an LLP are protected by restricted responsibility from the duties and debts of the firm. Partners in an LLP also have limited liability protection from malpractice claims resulting from the negligence of another partner.
4. Professional Limited Partnerships
A limited partnership may be created by any sort of firm, but LLPs can only be utilised by particular professions, like accountants and architects. In reality, only solicitors or accountants are permitted to create LLPs in jurisdictions like California. A limited partnership does not require each member to hold the proper state-issued occupational licence, but an LLP does. This criterion precludes an LLP from acquiring competent members with business skills just because they are not licenced professionals.
5. Tax and Income Considerations
In a limited partnership, the general partner is obligated to pay self-employment taxes on money that it receives from the firm, whereas limited partners are not obligated to pay self-employment taxes.
An LLP, on the other hand, requires that each partner pay self-employment taxes on her portion of the business’s gains and losses. Additionally, limited partners get business revenues following the general partners’ distribution of their respective profits-sharing interests. This is in contrast to an LLP, where each partner shares in the company’s revenues and losses based on her ownership stake.
Businesses with many owners can be limited partnerships (LPs) or limited liability partnerships (LLPs), both of which offer some of their owners limited personal responsibility protection for company debts; however, this protection is not offered in a general partnership. One owner is regarded as the general partner in limited partnerships, who has the authority to make company decisions and is also personally accountable for all business obligations.
One benefit of being a limited partner is that you are not personally accountable for the debts of the firm. They also have one limited partner who invests in business but does not participate in day-to-day business decisions and operations. While there are no general partners in a limited liability partnership, all of the partners in an LLP are only personally liable for the obligations of the firm.