Difference Between a Limited Partnership and an LLC

Liability issues are always out there. In the event you pick beginning a business that you know could have a degree of liability for your investors, the first thing to think about is which entity structure you intend on using. Your choices include corporation, limited partnership or a limited liability company, usually known as an LLC. Most start-up businesses pick an LLC or limited partnership (LP).

Both the LLC and the LP limited liability. Liability is of particular importance when the owner-operators are directly involved with the day-to-day management of the company. In a limited partnership, the limited partners have a minimal liability to the extent of their involvement in management. Limited partners are not supposed to be involved with management. It is the general partner's responsibility to operate the partnership in accordance to the LP agreement. Since the general partner is directly involved with managing the company partnership, the liability falls on him.

A corporation pays its own taxes on earned income, a LP and an LLC both have pass through income or loss features. Every partner or member receives a K-1 form from his respective general partner or manager stating the total earnings minus total expenses and the professional rata share distribution or loss of the company. Each partner or member then reports his distribution or loss on schedule E form in his yearly 1040 tax return.

With an LLC, liability can be increased or decreased by determining who is running the company. Investors are thought about members in an LLC, while an individual outside the LLC hired to manage it is called a manager; a member may also serve as manager. An LLC can be composed of managers, members and member/managers. Managers and member/managers take on the greatest liability since they are involved with the day-to-day management of the company.

Capital accounts, which identify partners/members contributions and distributions, are necessary to be current and adjusted for both the limited partnership and LLC.

The general partner of a limited partnership is responsible for filing a certificate of limited partnership with the secretary of state in the state where the limited partnership is domiciled. The manager of an LLC is necessary to file Articles of Organization with the secretary of state in the state in which the LLC is domiciled.

In the event you pick to make use of an LLC to raise capital, make sure that your offering documents include your operating agreement.