When choosing how to register their business, one of the decisions entrepreneurs are faced with is choosing between a Limited Partnership v. LLC. It’s important that new owners select the correct business structure, as it could not only save them money but could also avoid headaches in the future. When it comes to making such a critical decision, proper information is crucial. Below are five smart business considerations entrepreneurs should think about when deciding between a Limited Partnership v. LLC.
1) Preferred Management
When making the choice between a Limited Partnership v. LLC, new owners would be wise to consider the management structure of both. A limited partnership must include at least two individuals, who split their duties as a general partner and a limited partner. General partners are the only individuals who can make management decisions. Limited partners, on the other hand, cannot make management decisions and are only liable for their initial investment.
LLCs, on the other hand, can include multiple different members. The LLC’s Operating Agreement sets the management rights of its members. LLCs have significantly more flexibility in determining the role of its members.
There may be some tax advantages of choosing to register as one company versus the other. LLC owners can elect to “pass-through” profits to their personal tax returns, which means the company would not be subject to corporate taxes. The amounts that are passed through are strictly up to the LLC’s membership. If registering a business as a limited partnership, partners are required to pay federal personal income taxes on any profit distributions they receive.
Another big difference when comparing a Limited Partnership v. LLC is the liability from which individuals are protected. For example, liability protection varies for partners in a limited partnership. General partners are subject to full personal liability, while limited partners are protected from debts and liabilities. This means that if a limited partnership were ever to get into debt, the company seeking monetary damages could sue the general partners for the full amount.
LLCs protect their members much in the same way a limited partner is protected. LLCs protect the assets of all of their members. This means that business members are not liable to repay business debts from their personal funds.
4) LLC – A Further Breakdown
LLCs could be advantageous because owners are allowed to operate much like a corporation without hefty filing fees or extensive paperwork. They also receive a tremendous amount of liability protection in the process, which could encourage others to join the company. However, LLCs must go out of their way to define their corporate structure and indicate what happens if one of the members were to pass away or stop working at the company.
5) LP – A Further Breakdown
Limited Partnerships could be advantageous to new business owners because they can seek investment capital without having to give up a stake in the company. Investors may be more willing to invest in a LP because they do nothing more than provide capital and are only liable for the money in which they provide. The management structure of an LP is much more defined.
Hopefully after considering these five factors, entrepreneurs will have a much better idea of whether they should register as an LP or an LLC.