A limited partnership (LP) is a business entity that has at least one general partner (who is immune to personal liability) as well as one limited partner (whose liability is limited by their investment in the company).
General partners are responsible for managing the business operations and making decisions that will help achieve the business goals. The limited partners, sometimes called silent partners or simply partners, are responsible for investing in the company but not running it.
To learn more about other terms commonly used in venture capital, check out our complete VC Glossary.
A business partnership is an arrangement in which two or more people agree to be co-owners. While partners can own any percentage of the ownership, they must have equal or greater than 100 percent.
Many people think of general partnerships (GP) when it comes to partnership. There are two types of common business partnerships: the limited partnership (LP) or the limited liability partnership (LLP).
A general partnership is where two or more people share the management and personal responsibilities of a business. This structure is the most straightforward when you start a business with one or several partners.
It is easy to create a general partnership.
The limited partner is composed of two types: general partners or limited partners. This business structure is a hybrid of a general partnership or a corporation. Some partners have limited liability protection.
LP Limited Partnerships:
In an LP, general partners are responsible for all obligations and could be held liable if something happens to the business. The general partners have the greatest control over how the business runs.
A limited partner is someone who makes investments to support the business goals but does not directly participate in management decisions. This is a key difference between general and limited partner.
This type of business structure is not often used in short-term, specific situations, such as film or real estate projects, as well as family estate planning.
There are some requirements that you must understand when creating a limited partnership.
A limited-liability partnership is very similar to an LLC (limited liability company) in that all members are given limited liability protection. In some states, however, LLP partners get less liability protection than an LLC.
The requirements for LLP differ from one state to the next.
If you are comparing the differences between partnerships and LLCs, remember that partners are the owners of limited partnerships, general partnerships and LLPs. Members are LLC owners.
An LLP must include an entity indicator in its title such as Limited Partnership, LLP, or L.L.P. An LLC, limited partnership or other statutory entity that provides liability protection for some or all of its owners must also have this indicator.
These are the requirements to form a limited liability partnership. (Please note that laws can vary from one state to the next.
The limited liability corporation (LLC) exists independently from its owners. This legally ensures that members are not personally liable for business debts or liabilities.
A LLC allows for pass-through taxes because income earned at the entity level is not subject to tax. If the LLC has more than one owner, members must still file a tax return. Once the return is filed, income and loss of the LLC are passed on to the owners.
All LLC members must report their income and loss on tax returns, and pay any taxes and fees required.
These are the requirements for forming an LLC
A partnership has the greatest disadvantage: potential liability. A general partnership means that all partners are personally responsible for the obligations and debts of the business. Legally, the owners are the same as the business. Personal assets can be used to support the business.
A general partnership also has a responsibility for all actions taken by the partners. General partnerships are the most straightforward to establish and have the lowest ongoing cost. However, they pose the greatest risk for business partners.
The general partners are exempt from all liability in a limited partnership. A limited partnership offers limited partners minimal liability. However, limited partners must be cautious not to take part in management. They could lose their limited liability status.
While partnerships allow for flexibility in management, decisions made by one partner in a general or limited partnership can be binding on the other partners.
One partner might decide to enter into an arrangement without notifying the other partners. However, the other partners would still be bound to the terms.
Credit obligations are the same. All partners are responsible for a loan that is secured by one partner.
Limited partnerships are limited partners who have no control over management decisions but can only be liable for the initial investment.
If safeguards were not in place at the time the partnership was formed, a general partnership will dissolve upon the death of or withdrawal of any partner. If not, the laws of the formation state will determine the events that can trigger dissolution. This could include the dissociation of a partner.
Similar to an LP or LLP, a state statute could state that disassociation of a partner can trigger dissolution unless the agreement addresses this scenario.
General partnerships are limited in their ability raise capital and attract investors due to personal liability. A partner who contributes capital to a partnership receives an ownership share in all assets and not just the property.
An LLC is a better choice than forming a partnership for liability and ownership. An LLC offers business owners the advantages of both a corporation and partnership structure.
LLCs are a great choice for businesses with medium and high-risk operations, as owners have significant personal assets that can be protected.
An LLC’s owners or members are exempt from personal liability for the actions of the LLC or other members. Creditors cannot sue members for personal assets such as a house or savings account to pay business debts. This contrasts with general partners, whose personal assets are able to be pursued against the company’s debts.
A LLC can have many management options. The members of an LLC can be individuals or partnerships, trusts, corporations, or both. There is no limit to the number of members. An LLC may also choose to have its members manage the day-to-day operations (member managed), or they can have these tasks performed by non-members.
A LLC can help a business start to establish credibility better than if it is run as a general partnership.
The start-up costs for general partnerships are higher than those of corporations and more similar to that of corporations. General partnerships don’t have to pay annual fees or filing documents.
It can be difficult to cash a business check. Checks made payable to LLC are not allowed by some banks. Other banks may permit designated signatories to cash business checks with proper verification.
An LLC must show that it exists independently from its owners to avoid personal exposure. Keep records of important business decisions. This will prevent the comingling business and personal assets. Also, comply with LLC requirements (keeping minutes and annual filings, filing fees, etc.
Considering all these details together will help you decide which business structure works best for you and your business partner. Below is a summary of the major differences between them in terms of liability and management.
LLCs provide protection for owners from personal liability in the event of business debts or lawsuits. This protects all owners’ personal assets.
General partnerships allow owners unlimited personal liability for business debts. This includes the actions of employees. All other owners are also subject to unlimited personal liability.
Limited partnerships (LP) only offer personal liability protection for certain partners. The general partner is responsible for all the business’s debts and bears a lot of the risk.
An LLP’s general partners have limited liability. LLPs often need to have insurance policies to protect their personal liability. An LLP’s business interests are less protected than an LLC in some states. These states do not allow partners to be held liable for contractual debts, but they may still be liable in torts.
A standard corporation is more complicated to set up than an LLC. Owners of multi-member LLCs must sign an operating agreement which clarifies their rights and responsibilities.
Articles of organization must be filed with the appropriate state office by LLCs. These documents usually identify the LLC’s name, address, principal office location, management team, identities, registered agent and any LLC term or duration.
Although most states have fewer requirements for LLCs than they do for corporations, recordkeeping remains a requirement for both corporations and LLCs. You must keep various records, including the governing documents and shareholder and member lists as well as certain tax returns. Other requirements include the filing of annual reports, payment of annual fees, and maintaining an office and registered agent.
The owners may form a general partnership by simply starting to do business. There is no need to pay any filing fees, ongoing state fees, or franchise taxes.
It is not necessary to form a general partnership in order to hold annual meetings, issue partnership interests, or keep personal assets separate. This makes formation and maintenance of the partnership simple and economical.
Both business structures share the same requirements for formation and continued management as an LLC. This includes handling fees and paperwork.
All businesses must still comply with certain state and local requirements. These include registering d/b/a addresses and fulfilling business license/permit obligations. These requirements apply to any type of partnership, LLC included.
An LLC is not considered a separate entity taxable. This means that federal taxes are not paid at the business level. All business income and deductions go through the members.
LLCs that don’t want to be taxed like corporations will be taxed just as if they were a partnership. There is no LLC taxation. A LLC that has more than one member is taxed either under Subchapter C of the Internal Revenue Code for Corporations (Subchapter S or S), or the subchapter for Partnerships (Subchapter J).
All three types of partnerships enjoy the benefits pass-through taxation.
Summary:The LLC’s Operating Agreement can be used to organize management roles and decision-making power in a manner that suits your business. The LLC’s owners can decide whether the LLC will be managed by all members, or if certain members have decision-making and management powers.
It is important to clearly define roles and manage a general partnership. To clearly define each partner’s management duties and responsibilities, it is recommended that they sign a written partnership agreement.
You will need one or more general partners as well as one or two limited partners to form a limited partnership. Limited partnerships permit the raising additional capital through limited partners. The very definition of limited partnership means these partners remain silent partners while the general partners retain control. The partnership agreement outlines the general partners’ management responsibilities and duties, as well as their liability.
A LLP must have at least two partners (owners). The partners sign a partnership agreement detailing the management responsibilities, liabilities, and duties for each owner upon formation.
The partnership agreement allows for the addition or retirement of partners, which makes it simple to add partners who have existing business.
The most important decision you’ll make when starting a business is to choose the right legal structure. When weighing your options, consider the advantages and disadvantages of a partnership business, whether general or limited partnership or even a LLC, including control and asset protection as well as taxation.
Depending on your industry and state laws, there may be restrictions on which entity you can choose.
Each option has its advantages and disadvantages. No one entity is the best in all situations.
Before making any final decisions, consult with a lawyer. You can get your business off to the right start by choosing the right structure.
To learn more about other terms and metrics commonly used in venture capital, check out our complete VC Glossary.
An operating agreement is a legal document used by companies to define their organizational structure, roles and duties of owners and other key parties involved in the business, and methods for handling all transactions that occur within the company.
Stock options in startups work as a form of equity payment that allows an employee to purchase a certain number of shares of company stock at a specified price.
An over-allotment option allows companies to issue extra shares of their stocks beyond those that they initially planned or announced when they go public (or offer other securities). It’s also known as a “greenshoe option”.
Participating preferred stock is a type of preferred stock that gives the holder the option to receive dividends equal to or greater than the customarily defined rate at which preferred dividends will be paid to preferred shareholders.
