Choosing an LLC or a limited partnership for your new business

If you are planning to start a business with one or more others, you are probably deciding whether to set it up as a limited partnership or a limited liability company (LLC). Each has some advantages and disadvantages, but in most cases, we recommend the LLC option.

A limited partnership is somewhat more complex to set up than an LLC, and it is a good business entity to use as an investment vehicle. A limited partnership has at least one general partner and one or more limited partners. The limited partners are merely investors; they have no control over the day-to-day operation of the business. They are also shielded from excess liability for business losses, while general partners are not.

When you set up a limited partnership, it can act much like a corporation, where the investors stand to lose only their investment in times of trouble. Meanwhile, when profits arise, the limited partners are entitled to a share in those profits. Limited partnership interests are, in fact, considered securities and are regulated as such.

One downside is that running a limited partnership is cumbersome. As an entity, it is not agile. Since the investors (limited partners) can’t participate in day-to-day business decisions, disputes can arise that take time to resolve.

Another downside is that the general partner, who has all the control, also faces full responsibility for any business debts and lawsuits. The limited partners inject cash but don’t take on those responsibilities.

An LLC has several advantages

Like a partnership, a limited liability company is a pass-through entity for taxation. That means that it doesn’t pay its own taxes. Instead, profits and losses are attributed to the members of the LLC and are accounted for on their individual tax returns. If two or more people start an LLC, they can pay taxes as if they were a partnership.

The membership agreement allows investors to participate in operating the business. It is easy to set up, often requiring less paperwork than a limited partnership. Membership in an LLC is not regulated as a security.

LLCs are simple and agile. Unlike in a corporation, there is no board of directors. Management and investors can be the same group.

Members of an LLC do not have unlimited liability for business loses or lawsuits. The membership agreement protects the members from attachment of their ownership interest by litigants.

If you are interested in the advantages or potential downsides of forming an LLC or another business entity, talk to your business law attorney.