Choosing the right business entity is an important phase in business formation. Each type of business entity has certain advantages and disadvantages for the partners. The type of business, the partners’ goals, and state laws factor into your decision whether to form an LLP or an LP. An experienced business formation attorney can help you determine whether an LP or an LLP is best for your needs and goals.
What is a Limited Liability Partnership?
A limited liability partnership (LLP) is formed by two or more individuals who desire to conduct business for profit. An LLP partner is liable for any wrongful acts he commits or is committed by someone he supervises. However, the partner’s personal liability is limited to his capital contribution in the LLP. Therefore, a partner’s personal assets are not at risk for wrongdoing committed by another partner or because of the company’s losses or debts.
Another benefit of forming an LLP is that you are not required to maintain corporate formalities, such as annual meetings or corporate filings. All partners can conduct business for the LLP and participate in management duties.
LLPs are pass-through entities. Therefore, the LLP does not pay taxes for the business entity. All profits of the LLP are “passed” to the partners and taxed as personal income for the partners. This prevents double taxation of income earned by the LLP. However, LLPs should file informational federal tax returns and K-1 forms to report each partner’s share in the LLP’s profits.
A disadvantage of an LLP is that some states limit the types of professions that can form an LLP. For example, some states may limit LLPs to accountants or lawyers. Each partner in an LLP must have all state-issued occupational licenses required to conduct business within the state.
What is a Limited Partnership?
A limited partnership (LP) is also a business entity formed by two or more individuals to conduct business for profit. However, an LP must consist of one or more limited partners and at least one general partner. The general partner may be a corporation instead of an individual.
As with an LLP, the benefits of an LP include no mandatory corporate formalities, the personal liability of limited partners is limited to capital contributions, and, no double taxation since LP’s are also pass-through entities. However, LPs have several disadvantages that you do not have in an LLP.
General partners do not have limited liability in an LP. Therefore, the liability of the LP extends to the personal assets of the general partners. Because a corporation can serve as a general partner, you can attempt to limit the liability of a general partner by naming a corporation as the general partner instead of an individual. In addition, a general partner is liable for his wrongdoing, but also the wrongdoing of any of the limited partners in the LP.
Another disadvantage for limited partners in an LP is that they cannot participate in the management of the LP. Only general partners have the right to manage the LP.
Contact a Business Formation Attorney for More Information
The above discussion of LPs and LLPs is not an exhaustive list of the benefits and issues that you should consider when forming a business entity. An experienced business attorney understands all issues that must be considered when forming a business and selecting a legal entity for the business. Business formation attorney Steve Thienel provides personalized service and legal advice for individuals in DC, Maryland, and Virginia regarding all aspects of business formation and business operations. Call today to schedule a consultation.