LP vs. LLP: What’s the Difference?

Partnerships are frequently used for many types of businesses and professions, but it can be difficult to know which type of partnership is best for your new venture. Choosing the right structure is important not only for serving the interests of the partners but also for complying with certain state regulations. 

While there are several types of partnerships recognized by state law, here we’ll cover two common ones: limited partnership vs. limited liability partnership (or LP vs. LLP). Discover the defining aspects of each type, their similarities and differences, and how to form one in your state. 

What is a limited partnership (LP)?

A limited partnership is a business entity that consists of at least one general partner and one or more limited partners. The general partners manage daily operations of the business and have unlimited personal liability, meaning that their personal assets may not be protected from business creditors or lawsuits. The limited partners invest capital but don’t participate in the business’s operations, and their liability is limited to the amount they invested. LPs are enticing for this reason—because general partners can retain control while receiving funding from limited partners, and limited partners can share in profits while limiting their liability. 

You’ll often see limited partnerships used for investment purposes, such as in the real estate industry. They have even become popular with estate planning through family limited partnerships.

What is a limited liability partnership (LLP)?

As indicated by its name, a limited liability partnership (sometimes referred to as a “registered limited liability partnership”) is a type of partnership business structure that offers every partner limited liability, where their personal assets are protected from business debts and partner negligence. With an LLP, there are no limited partners, only general partners who share in the management and operations of the business.

A key distinction between LLP vs. LP is that not all states allow LLPs, and some restrict them to certain businesses with licensed professionals, such as medical practices and law, accounting, and architecture firms. To find out whether your state allows limited liability partnerships, check with your state's business regulation agency (most often the Secretary of State).

Key differences and similarities between LPs and LLPs

When comparing LP vs. LLP, you’ll find that, although their business formation is similar, many other aspects are different. Key differences include liability, structure and management, regulation, and raising capital.

Limitation of liability

An LLP offers limited liability for all of the partners. This limitation of personal liability applies to business debts and partner negligence.       

With an LP, the general partners may still be personally liable for business debts and partner negligence. However, the limited partners are only liable for business debts, including any losses the business may suffer, up to the amount of their investment. Limited partners only risk what they invest in the business.

Structural difference and management

Another difference between a limited partnership vs. limited liability partnership is their organizational structures. In an LP, there are two classes of owners: general partner and limited partner. There may be one or more general partners and one or more limited partners. General partners make business decisions and handle the day-to-day business operations. Limited partners of an LP are basically investors who contribute assets to the business and who share in the profits, but they do not participate in the decision-making or business operations. 

An LLP has only general partners, all of whom contribute money, assets, or time to the business. All are entitled to participate in business decisions and operations, and all share in profits or losses.

Formation and regulation

Nearly every state allows LPs, but not all states allow LLPs. For states that do allow these types of business entities, formation is governed by the law of the state where the business is formed. State laws typically have certain requirements for the registration documents, the partnership agreement, the duties of the partners, and annual reporting.

Limited partnerships are formed by filing a certificate of limited partnership with the appropriate state agency and having all of the partners sign a limited partnership agreement. Limited partnership agreements aren’t always required to be submitted to the state, but it’s a good idea to draft one because it includes important information, such as the name of the partnership, the names of the general and limited partners, the contribution each partner will make, how profits will be distributed, and how new partners may be admitted. If there is more than one general partner, there may be an additional agreement just between the general partners. 

An LLP is formed by submitting your state’s registration document or application, and then having all of the partners sign a limited liability partnership agreement. This agreement is similar to the one for a limited partnership, except there will not be provisions relating to limited partners.

For LPs specifically, there may be additional regulations. State or federal securities laws may come into play if an LP offers limited partnership interests to more than 10 investors (or more than 35 in some states), to the general public, or to investors in other states. These laws may require the filing of rather complicated disclosure documents.

Raising capital

An LP is often better than an LLP if you expect to add partners in order to raise funds to expand your business. With an LP, limited partners can be added without giving them the right to participate in business decisions. In contrast, while an LLP can also raise funds, any partners added to an LLP will have the right to participate in business decisions and operations.

How to form a limited partnership or limited liability partnership

The processes for forming both an LP and LLP are similar, but they do vary by state. To ensure that your business is compliant, reference formation guidance from the Secretary of State or your state’s business division agency. 

When you’re ready to register your LP or LLP, follow these steps: 

• Choose a business name. Pick a business name that is distinguishable from other companies in your state. For inspiration, use our free business name generator, and don’t forget to check your state’s specific naming requirements. Most states allow you to reserve a business name while you get your formation paperwork in order.
• Select a registered agent. Choosing a registered agent is typically required, and you’ll likely need to include their information on your formation document.
• File the required forms. For LPs, file a certificate of limited partnership. For LLPs, the form you’ll need to file will likely be called a statement of registration or a certificate of LLP.
• Create a partnership agreement. Partnership agreements are generally not legally required for LP or LLP formation, but it’s in your best interest to draft one, as it informs the management and operations of the business. Keep this internal agreement on file.
• Get an EIN. Limited partnerships and limited liability partnerships are required to obtain a federal employer identification number (EIN). You can apply for an EIN through the Internal Revenue Service or with LegalZoom’s EIN service.
• Obtain required licenses and permits. Check with your city, county, and state to understand what type of business licenses or permits you need, as well as with any relevant occupational association. 
• Comply with tax and regulatory requirements. Submit any necessary annual reports and tax filings in accordance with your state’s regulations. 

How to choose the right structure for your business

If you’re trying to decide between a limited partnership vs. limited liability partnership, use the following questions as guidance: 

• What is the desired level of control and involvement for the partners?
• How much risk are you willing to take on regarding personal liability? 
• Does the state in which you want to register your business allow the formation of LPs and/or LLPs?
• Are you forming the business as an investment opportunity or to offer professional services? 
• Are there any industry-specific regulations and norms for the type of business you’d like to form?
• Do you foresee expanding the business in the future, requiring additional investment?

Consulting a legal professional may help you decide, as they understand state laws, tax implications, and more.

When you’re ready to start your business, check out our business formation services, offering everything you need to get your new venture up and running, from registering for a DBA to filing your annual reports—and much more.

FAQs

What are the costs associated with forming an LP or an LLP?

When forming an LP or an LLP, costs may include state filing fees to register your business, a fee to reserve your business name, submitting an annual report, hiring a registered agent, getting legal assistance, and license and permit fees. 

How are profits distributed in an LP and an LLP?

In an LP and LLP, profits are distributed to all partners, even to a limited partner of an LP. A partnership agreement should outline how the profits are distributed. 

What are the tax implications for an LP and an LLP?

Both LPs and LLPs are pass-through entities, meaning that income and losses are passed through to the partners, who pay individual taxes. The business itself does not pay income taxes; it is only done at the individual level. General partners and some limited partners may also be subject to self-employment tax.

Are there alternatives to LPs and LLPs?

A common alternative to LPs and LLPs is a limited liability company (LLC). This type of business structure offers personal liability protection for its owners (called members), flexible tax classifications, and flexible management. Learn more about how to start an LLC.