You have decided to take that big step and start your own business, but where do you begin to conquer this giant task? One of the first and most essential steps in starting and owning your own business is deciding on the structure for the business. The two most common business structures are limited partnerships (“LPs”) and limited liability companies (“LLCs”). LPs and LLCs have similarities that contribute to their consistent use in the corporate world but also key differences that you should consider when deciding which business structure is the best for you.

LPs are an offshoot of traditional partnerships, the most basic business structure that combines two or more people with a common business interest to carry out that business. LPs take this concept to another level by further establishing the relationship between the partners. One person or entity takes the role of general partner while other person(s) or entit(ies) take the role of limited partner(s). A general partner is responsible for the day-to-day operations and decision-making of the business. In contrast, the limited partners usually only monetize the business as an investment. This dynamic between general and limited partners sets this corporate structure apart from standard partnerships. Additionally, and most importantly, because general partners are responsible for the daily operations and decisions of the business, they are personally liable for the business if issues such as bankruptcy or lawsuits arise. In contrast, limited partners are not personally liable; their financial responsibility is restricted to the amount they have invested in the business. LPs offer several advantages beyond just limited liability. They can be considered pass-through entities for tax purposes, making them appealing to investors. Additionally, they are relatively easy to form and maintain compared to LLCs or corporations, primarily because only one individual is responsible for the business.

While LPs are more simplistic in their concept and structure, LLCs take corporate structure up another notch. LLCs, in their most basic form, are known as member-managed LLCs, where one or more individuals or entities comprise the business and are responsible for its daily operations and decision-making. LLCs can also be manager-managed, which resembles LPs in that a designated manager is accountable for the business’s daily operations. Simultaneously, some members are limited to making broader decisions for the business or are restricted to being investors. Unlike LPs, every member of an LLC is shielded from personal liability if legal issues arise with the business. The benefits of LLCs are vast, which is why they are the most common form of corporate structure in use today. They not only limit personal liability for their members but also can be treated as a pass-through entity, corporation, or disregarded entity for taxation purposes and provide flexibility and stability to the business.

The differences between LPs and LLCs come mainly from the entity’s structure at the management level. While LPs are controlled exclusively by the general partner, LLCs are controlled by their members in more traditional corporate positions such as a Board of Directors or Officers. This expanded corporate management structure allows for much more flexibility in how the business operates daily and yearly while also offering stability in making significant business decisions by spreading out decision-making power. However, this can also lead to a lack of action on behalf of a business due to needing approval from more than one person.

Deciding how to structure your business is one of the most important first steps in creating your own business. Limited partnerships provide greater flexibility in daily operations, are easy to establish and manage, and attract investors due to their limited liability. LLCs provide flexibility in their structure and taxation options while ensuring stability. We at RR&A are experts in forming limited partnerships, LLCs, and other business entities. We can assist you in determining the best business structure and help complete and prepare all necessary documentation to achieve your dream of starting and owning a business. Contact RR&A to help start your business journey.