What is a Limited Partnership (LP)?
A limited partnership consists of at least one general partner and one limited partner. The general partner and the general partnership have the same role which is to control the day-to-day operations of a business. Both are 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. Thus, 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.
- A limited partner does not suffer the same penalties, if-and only if they stick to a passive role. The limited partner’s liability can change if they start taking a more active position within the business. If the limited partner becomes an active member, then the liability towards them can be unlimited. If a limited partner has had a more active role, and a creditor can prove this, then that partner can be held responsible for those claims.
What are the advantages of a Limited Partnership (LP)?
Protection of personal asset: The limited partnership structure offers liability protection up to the amount of investment for the company’s limited partners.
Pass-through taxation: A limited partnership’s income is nontaxable at the business level; instead, business profit and loss “pass-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 is a legal structure. Under the terms of an LLC, there are no debts that accrue through members. Under an LLC, the characteristics of a corporation and a partnership or a sole partnership are merged. The LLC shares similarities to a corporation, but the flow-through taxation to members of an LLC is a key feature of the partnership.
Creating a Limited Liability Company
There are multiple differences for each state when forming a Limited liability company, but the general principles are maintained similarly :
- 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 a 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 a percentage of interests, allocation of profits and losses, member’s rights and responsibilities and other provisions.
- Get Licenses and Permits. Once your business has undergone registration, 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 that afford shareholders of a corporation.
- Less Recordkeeping. 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?
An LLP has similarities to a general partnership. In an LLP, some (or all) partners are held to limited liability. A company must have two partners in order to be considered an LLP. Each partner is only responsible for themselves. Neither party can be responsible for each other if claims of negligence or misconduct are bestowed.
Additionally, Limited Liability Partners have the right to manage the business directly, although the amount of liability limitation depends on state-by-state laws. Each state has its own specific requirements. Some states may only handle personal liability for a negligent partner while other states may approach issues from a middle ground and only hold partners liable for negligence or misconduct.
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.
- Assets under an LLP have protection from 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 that will tax the entire company and then shareholders are taxed again.
Let DOT Help You File
DOT Operating Authority maintains professional agents that have the skills and knowledge to assist you with the intricate steps of filing for corporations. We can happily assist you with filing for an LLP or an LLC.
We can help guide you through the process and assist you in figuring out which classification or filing would best benefit your company. Filing for these requests can be a time consuming and intricate process. The paperwork and legal requirements can also be a handful, so let DOT Operating Authority take the burden off of your hands!