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What is a LP (Limited Partnership)?

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 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.

 

Takeaways:

  • Assets are protected by limited partnerships.
  • Corporations allow personal lawsuits to be filed against shareholders. Limited partnerships, however, prevent the partner’s interest being taken in personal lawsuits.
  • Limited partners are often called “silent” partners. They can still invest in the company, but they cannot vote on the day-to-day business decisions.

 

What is a partnership?

A 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 partnerships: the limited partnership ( LP) or the limited liability partnership( LLP).

 

General Partnership (GP)

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.

 

  • A general partnership does not require the filing of specific state statutes to create it.
    (Note: Some states have laws or statutes that relate to partnerships. However, these provisions are often default provisions and address issues not covered by an agreement.
  • You must make an agreement with one or more of your partners to form a general partnership. Although the agreement can be made verbally, it is best to have it signed by all of your partners in order to avoid any conflicts later. The agreement should outline each partner’s rights, responsibilities, and duties.
  • Partner can be anyone. Partner can be either an individual or a partnership, limited-liability company, corporation or trust.

 

Limited Partnership (LP)

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.

 

Limited Partnerships:

 

  • A minimum of one partner must be a general partnership with unlimited liability.
  • A minimum of one partner must be limited. The amount of the investment is usually what limits this person’s liability.

 

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 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.

 

  • This business structure is set up under state law. The state must file various documents, including a certificate or similar document of limited partnership. You can choose any state to be the state of formation.
  • LPs must have a partnership agreement. They also need to publicly disclose their status through the inclusion of the LP designation in company names.

 

Limited Liability Partnership (LLP)

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.

 

  • Some states limit the options for an LLP to professional services, which are usually ones that require a state licence, such as doctors, accountants, and attorneys.
  • Similar to the above, an LLP might be the only or few option for certain professions in order to form a group practice. California licensees such as doctors, lawyers, architects and doctors can form an LLP (professional corporation), but not an LLC.
  • Some states allow an LLP for any purpose.

 

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.

 

  • When registering a company as an LLP, you will need to provide documentation. These documents must be filed with appropriate state agencies along with the required filing fees. Sometimes, one of these documents is called a statement or certificate of limited liability partnership.
  • If you meet the requirements for an LLP, any state can be selected as the formation state.
  • Some states require that the new LLP be published in one or several local newspapers.
  • To form an LLP structure, the business must have at least two partners.
  • Converting general partnerships retain their original partnership agreements. The LLP is governed both by the state law on general partnerships and the specific provisions of the partnership laws governing LLPs.

 

 

What is an LLC?

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

 

  • Filing Articles Of Organization with The Secretary of State
  • Choose a qualified business name
  • How to prepare an operating agreement
  • Selecting a registered agent

 

There are many reasons to form a partnership

General Partnership

  • It is easy to set up. It is easy to create a general partnership. The partnership is created automatically when the partners start business activities.
  • Operational costs are low. You also have lower on-going and start-up costs. A GP does not require a state filing to be formed. This means that you do not need to pay an initial filing fee, ongoing fees, or franchise taxes.
  • There are few ongoing requirements. The business does not have to be a general partner.
    • Annual meetings for owners.
    • Issue partnership interest.
    • Separate personal assets from business assets.
    • While a partnership agreement is recommended but not necessary, it is highly recommended. It is recommended that a partnership agreement be created when forming a GP. This agreement should outline management roles, responsibilities, and possible business-dissolving events.

 

Limited Partnership

  • Limited partners have limited liability. Limited partners have separate personal assets from the business. They are not personally responsible for business debts. Their liability is limited by their investment in the LP. Because of their limited liability, many LPs choose to use an LLC or corporation for the general partner.
  • Management of business decisions. Management is not available to limited partners. General partners manage the day to day operations.
  • Pass-through taxation. The business does not pay income tax. The business does not pay income tax. Profits and losses are reported to the tax returns of the partners. Any tax due is paid at an individual level.
  • Short-term projects. Most often, limited partnerships are used for short-term ventures. Films, for example, are often made as limited partnerships (LPs) and family estate planning often takes advantage of LPs.

 

Limited Liability Partnership

  • Personal asset protection. Typically, partners in an LLP are not required to use their personal assets to settle business debts or liabilities.
  • Pass-through taxation. The business does not pay income tax. The business does not pay income tax. Profits and losses are reported to the tax returns of the partners. Any tax due is paid at an individual level.
  • Conversion from general partnership is easier. Generally, LLPs are easier to convert from a general partnership into an LLP than an LLC or corporation.

 

Partnerships have their disadvantages

Liability (GP, LI)

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.

 

Management (GP/LP, LLP, LLP)

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.

 

Unexpected dissolution (GP/LP, LLP, LLP)

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.

 

Raising capital (GP)

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.

 

There are many reasons to form an LLC

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.

 

Limitated liability

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.

 

Greater flexibility

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.

 

Enhanced credibility

A LLC can help a business start to establish credibility better than if it is run as a general partnership.

 

There are disadvantages to forming an LLC

Cost

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.

 

Banking

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.

 

Separate records

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.

 

Comparison of LLCs and partnerships: The main differences

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.

 

Asset protection / Limited liability protection

Limited Liability Company

LLCs provide protection for owners from personal liability in the event of business debts or lawsuits. This protects all owners’ personal assets.

 

General Partnership

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 Partnership

Limited partnerships 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.

 

Limited Liability Partnership

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.

 

For ongoing and new requirements

Limited Liability Company

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.

 

General Partnership

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.

 

Limited Partnerships/Limited Liability Partnerships

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.

 

Pass-through taxation

Limited Liability Company

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).

 

General Partnership, Limited Partnership, Limited Liability Partnership

All three types of partnerships enjoy the benefits pass-through taxation.

 

Limited Liability Company

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.

 

General Partnership

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.

 

Limited Partnership

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. 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.

 

Limited Liability Partnership

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.

 

Bottom line

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 each structure, 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 commonly used in venture capital, check out our complete VC Glossary.

 

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