What is a Limited Partnership (LP)?
A limited partnership has at least one general partner and one limited partner. The general partner has the same role as in a general partnership: controlling the company’s day-to-day operations and being personally liable for business debts.
- Limited partners do not play an active role in the business. The limited partners (most LPs have more than one limited partner) contribute financially to the business but have very little control over business decisions or operations. They normally cannot bind the partnership to business deals.
- Limited partners are not personally liable. In return for giving up management power, limited partners get the benefit of protection from personal liability. This also means that a limited partner can’t be forced to pay off business debts or claims with personal assets. A limited partner, however, can lose his or her financial investment in the business.
- Limited partners face slightly different tax rules. For income tax purposes, limited partnerships generally are treated like general partnerships, with all partners individually reporting and paying taxes on their share of the profits each year. Limited partners, as a rule, do not have to pay self-employment taxes; because they are not active in the business, their share of partnership income is not considered “earned income” for purposes of the self-employment tax.
Limited partners need to understand that they can become personally liable if they do not stick to their passive role. Also, if a limited partner starts taking an active role in the business, that partner’s liability can become unlimited. If a creditor proves that a limited partner took acts that led the creditor to believe that he or she was a general partner, that partner can be held fully and personally responsible for the creditor’s claims.
What are the advantages of a Limited Partnership (LP)?
Advantages of a limited partnership include:
Protection of personal asset : The limited partnership structure offers liability protection up to the amount of the investment for the company’s limited partners.
Pass-through taxation: A limited partnership’s income is not taxed at the business level; instead, business profit and loss are “passed through” to the partners for reporting on their personal tax returns.
Full oversight: The general partner has complete management control of the limited partnership.
Investment potential: Limited partnerships can make capital investments by adding more limited partners.
What is a Limited Liability Company?
A limited liability company (LLC) is a legal structure whereby the members of the company cannot be held personally liable for the company’s debts or liabilities. Limited liability companies are essentially hybrid entities that combine the characteristics of a corporation and a partnership or sole proprietorship. While the limited liability feature is similar to that of a corporation, the availability of flow-through taxation to the members of an LLC is a feature of partnerships.
Creating a Limited Liability Company
While each state has some differences to forming an Limited Liability Company, they all have similar general principles:
- Pick a Business Name. There are 3 rules that your LLC name needs to follow: first, it must be different from an existing LLC in your state, second, it must indicate that it’s an LLC and last, it must not include state word restrictions.
- File the Articles of Organization. The “articles of organization” is a simple document that legitimizes your LLC and includes information like your business name, address, and the names of its members.
- Create an Operating Agreement. Most states do not require operating agreements. However, an operating agreement is high recommendation for multi-member LLCs because it structures your LLC’s finances and organization, and provides rules and regulations for smooth operation. The operating agreement usually includes percentage of interests, allocation of profits and losses, member’s rights and responsibilities and other provisions.
- Get Licenses and Permits. Once your business is registered, you must obtain business licenses and permits. Regulations also vary by industry, state and locality.
- Announce Your Business. Some states require the extra step of publishing a statement in your local newspaper about your LLC formation.
Advantages of an LLC
- Limited Liability. Members are in protection from personal liability for business decisions or actions of the LLC. Therefore, this means that if the LLC collects debt or is sued, members’ personal assets are usually exempt. Furthermore, This is like the liability protections afforded to shareholders of a corporation.
- Less Record keeping. An LLC’s operational ease is one of its greatest advantages. In comparison to an S-Corporation, there is less registration paperwork and their start-up costs are lower.
- Sharing of Profits. There are fewer restrictions on profit sharing within an LLC, as members distribute profits as they see fit. Members might also contribute different amounts of capital and sweat equity. Consequently, it’s up to the members themselves to decide who has earned what percentage of the profits or losses.
What is a Limited Liability Partnership?
A Limited Liability Partnership, or LLP, is a bit similar to a general partnership. However, in an LLP, some (or all) partners have limited liabilities. Essentially, this means that the company must have at least two partners. And, each partner is responsible for only themselves. As a result, they can’t be held responsible or liable for another partner’s negligence or misconduct.
In addition, with this type of corporation, Limited Liability Partners have the right to manage the business directly. But, the amount of liability limitation depends on state laws. Each state can vary and have specific requirements. For example, some states only limit personal liability for the negligence of a partner. However, other states might take a more middle ground and only hold partners liable for their own negligence.
Advantages of a Limited Liability Partnership
- In an LLP, all partners get a say in how the business’ day-to-day operations are run, and have liability protection.
- It is easier to bring in new partners and let older partners out in an LLP.
- As a partner in an LLP, your own assets are generally protected from any legal action. You might lose assets in regard to the partnership in a lawsuit, but not your own personal assets.
- In terms of taxes, partners in an LLP will receive untaxed profits and THEN pay taxes individually. This is more beneficial than a corporation which will tax the entire company and then shareholders are taxed again.
Let DOT Help You File as an LLP
Here at DOT, we have skilled agents that understand the intricate processes of filing for corporations. We can walk you through the process and help you step-by-step to file as an LLP.
In fact, we can give you advice on which classification or filing would be best for your company! Don’t stress about the paperwork and legal requirements of your commercial trucking business. Instead, let DOT take the burden for you.
Simply contact an agent at DOT today and we’ll give you more information on filing as an LLP!