LP stands for “limited partnership.”  LLP stands for “limited liability partnership.”  They mean almost the same thing, with the difference being whether limited partners can participate in management.  These kinds of partnerships are generally designed for partners who are engaged in the same type of profession, such as a law firm or an accounting firm.

There are pros and cons of starting a limited partnership or limited liability partnership.  Some of the pros are, first and most importantly, limited liability for the limited partners in an LP.  These partners can contribute the capital in a partnership without risking their personal assets.  In an LLP, the liability is limited only for partners who did not participate in creating the problem or the debt. 

Also, there is no double taxation in LP’s and LLP’s.  Double taxation happens in corporations because the corporation pays income tax on its profits, and then uses the remaining profits to pay dividends to shareholders, who again pay their own individual income tax on it.  Thus, the same profit gets taxed twice.  However, with partnerships, the partners themselves are taxed on their personal income tax returns for their share of ownership in the partnership, which usually amounts to less tax.

What are the drawbacks of an LP or an LLP?  First of all, there is no limited liability for the general partner in an LP.  There is also no limited liability for the partners in an LLP who participate actively in management and take big business risks.  For either the general partner in an LP, or the risk-taking partner in an LLP, creditors can reach their personal assets.  Second, the shares in a partnership cannot be publicly traded on the stock market.  Publicly trading shares on the stock market is how most big companies go from small companies to large companies.  For example, companies like Google and AT&T are publicly traded companies.  This means that, if you have an LP or LLP, that you limit your growth potential.  However, your company can still become quite profitable, just likely not as enormous as Google and AT&T. 

Finally, limited partners in an LP, if they try to become active in the business, risk being seen by the law as general partners, in which case, they too risk personal liability.  Thus, if they want to always be seen as limited partners, they must not interfere too much in business operations, even if they disagree with the decisions of the general partner.

So is an LP right for David?  Probably not.  David has a vision and wants to see it through.  Thus, he’ll want management rights, which means he would have to be a general partner if he has an LP.  General partners do not have limited liability in an LP, so he will be putting his personal assets at risk in his business.  In an LLP, David will be actively participating in management, which means he will not have much limited liability.  By actively participating in management, he will likely be the one to bring on the debt, and his personal assets may be at risk to his creditors.  Because David wants to protect his wife and children and his personal assets in the case his business fails, he will want to take advantage of limited liability, but he will not be able to do that and take an active role in management at the same time in either an LP or an LLP.  David should look for another kind of business.

For other information about Business Entities, please click on one of the following topics below:
Starting Your Own Limited Liability Business
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