What is the difference between a general limited and limited liability partnership?

A limited partnership is a type of partnership that consists of at least one general partner and at least one limited partner. A limited liability partnership does not have a general partner, since every partner in an LLP is given the ability to take part in the management of the company.

History of Limited Partnerships and LLPs

Limited partnerships were popular during the 1970s and 1980s. Today, many business owners form limited partnerships for films and other projects that will last for a short period of time. Limited liability partnerships are relatively new in comparison to limited partnerships. LLPs became popular in the 1990s, around the same time that limited liability companies became a popular formation choice among business owners.

Structure of Limited Partnerships and LLPs

In a limited partnership, the general partner is responsible for managing the company's day-to-day activities. The limited partner in a limited partnership does not participate in making managerial decisions for the business. In a limited partnership, the limited partner is more like a silent partner that has invested in the company. In a limited liability partnership, all partners of the company are allowed to make management decisions for the company.

In addition, general partners of a limited partnership may be limited liability companies or corporations, whereas LLCs and corporations may not be partners in an LLP.

Liability Protection Differences

If you're operating as a limited partnership, the general partner has unlimited liability for company losses and debts, while a limited partner has limited liability protection against company debts and losses. This means the general partner may lose his home and other personal assets because of losses and obligations that occur as a result of operating the business. Limited partners have personal asset protection against company obligations and debts.

In an LLP, all partners have limited liability protection against company obligations and debts. In addition, partners in an LLP have limited liability protection against malpractice suits that stem from another partner's negligent acts.

Professional Limited Partnerships

A limited partnership can be formed by any business type, while LLPs can only be used by certain types of professions, such as accountants and architects. In fact, states such as California limit LLP formation to lawyers or accountants. Every partner of an LLP must have the appropriate state-issued occupational license, which is not a requirement in a limited partnership. This requirement prevents an LLP from adding talented partners with business expertise, simply because they are not licensed professionals.

Income and Tax Considerations

In a limited partnership, the general partner must pay self-employment taxes on money received from the company, while limited partners are not required to pay self-employment taxes. This is in contrast to an LLP, where each partner must pay self-employment taxes on her share of the company's profits and losses. Furthermore, limited partners receive proceeds from the business after the general partners have received their share of company profits. This is in contrast to an LLP, where each partner receives profits and losses from the company according to her ownership interest in the company.

A partnership is an organization having two or more owners that functions as a trade or business.  Partnerships are almost as easy to form as a sole proprietorship: it’s an association of two or more persons to carry on a business for profit. Like a sole proprietorship, in most states there are no formal procedures to form a partnership – no forms to fill out, no agreements to sign and no documents to file – though it’s certainly desirable from a business and legal perspective. In a general partnership, partners share, jointly and severally, in the liability for business obligations.

Limited Partnerships:

A limited partnership differs from a general partnership in that it is typically defined as a partnership formed by one or more general partners and one or more limited partners. General partners are treated in the same manner as “typical” partners: they have joint and several liability for the debts of the partnership and often exercise control over the partnership. In contrast, limited partners may have limited liability (this depends on state law and how much control those limited partners exercise).

For tax purposes, while a partnership does file a separate return (a federal form 1065), income and losses associated with the partnership pass through to the individual partners. Items of income or loss retain their character and are reported to each partner in proportion to their interest, as determined either by statute or partnership agreement. Each partner is then responsible for reporting that information on their individual tax returns.

Limited Liability Partnerships: LLPs

A Limited Liability Partnership (“LLP”) is a relatively new form of entity. An LLP is similar to a general partnership but while a general partnership can exist on an informal basis, an LLP must register with the state. The benefit of registration – a formal acknowledgement of the entity – is that the LLP takes on a form of limited liability similar to that of a corporation. Typically, that means that partners aren’t liable for the bad behavior of the other partners though the level of liability can vary from state to state. There is generally unlimited personal liability for contractual obligations of the partnership such as promissory notes and mortgages (again, this varies by state).  For federal tax purposes, an LLP is treated as a pass-through entity, similar to a general partnership.

Partnerships: What is the Difference Between General, Limited, or LLP? was last modified: February 12th, 2021 by

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