By Christopher Carter Updated March 08, 2019
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.
As a seasoned expert in business structures and organizational models, I draw upon a wealth of knowledge acquired through extensive research, practical experience, and a keen understanding of the intricacies of various business entities. My expertise extends to legal frameworks, taxation implications, and the operational dynamics that define different organizational structures. Allow me to delve into the concepts presented in the article authored by Christopher Carter, focusing on Small Business, Business Models & Organizational Structure, and Limited Liability Partnerships (LLPs).
Limited Partnerships and LLPs: A Comprehensive Overview
Limited partnerships (LPs) and limited liability partnerships (LLPs) are distinctive forms of business entities, each with its unique characteristics and implications for business owners. Let's explore the key concepts highlighted in the article:
1. Limited Partnership (LP):
- Definition: A limited partnership is a business structure comprising at least one general partner and at least one limited partner.
- Historical Context: Popular during the 1970s and 1980s, LPs are still relevant today, especially in endeavors with short-term objectives like film projects.
- Structure: In LPs, the general partner manages day-to-day activities, while limited partners act as silent investors without involvement in managerial decisions.
- Liability: General partners bear unlimited liability for company losses, whereas limited partners enjoy limited liability protection against company debts and losses.
2. Limited Liability Partnership (LLP):
- Definition: An LLP is a partnership where every partner has the authority to participate in the management of the company, eliminating the concept of a general partner.
- Historical Context: LLPs gained popularity in the 1990s, concurrently with the rise of limited liability companies (LLCs) as a preferred formation choice.
- Structure: All partners in an LLP can make management decisions, distinguishing it from the more hierarchical LP structure.
- Liability: All partners benefit from limited liability protection against company obligations, debts, and even malpractice suits arising from another partner's negligence.
3. Professional Limited Partnerships:
- Specialization: While LPs can be formed by any business type, LLPs are often restricted to specific professions such as accountants and architects.
- Licensing Requirement: Partners in an LLP must hold state-issued occupational licenses, limiting the flexibility to include non-licensed professionals.
- Professional Exclusivity: Certain states, like California, restrict LLP formation to licensed professionals like lawyers or accountants.
4. Income and Tax Considerations:
- Limited Partnership Taxation: General partners in LPs pay self-employment taxes, whereas limited partners are exempt. Limited partners receive proceeds after general partners.
- LLP Taxation: All partners in an LLP must pay self-employment taxes on their share of profits and losses, with each partner receiving their share based on ownership interest.
In conclusion, understanding the nuances of limited partnerships and limited liability partnerships is crucial for business owners navigating the complexities of organizational structures. Whether considering liability protection, professional limitations, or tax implications, a comprehensive grasp of these concepts empowers entrepreneurs to make informed decisions aligning with their business objectives.
