LLCs vs. LPs: Which is best for your business?

When deciding on the kind of business structure that will provide the most effective asset protection, the choice for entrepreneurs often comes down to a limited liability company (LLC) or a limited partnerships (LP). Determining which will offer the best fit requires understanding both the business you intend to start and the differences between the two legal distinctions. 

What is an LLC?
An LLC is a distinct legal business entity, separate from the person who creates it. This allows the LLC to have its own tax ID number (similar to a Social Security number for a person) and own assets and debt, like bank accounts and credit cards. Otherwise, it functions similarly to a corporation, yet without many of the regulatory and tax formalities requires of corporations, such as annual expense reports and a limited number of members.

By being able to hold assets and debts in the name of a LLC, the business owner protects their own assets in the event that the business goes bankrupt. This his how the liability is limited for those with a stake in the company, making it one of the more popular choices in terms of legal distinctions for small business owners.

What is an LP?
A limited partnership is built on differing levels of partner share in the company. Unlike an LLC where partnerships responsibilities and liabilities are typically split up equally, an LP involves one or more general partners who act as managers with one or more limited partners. The general partners are responsible for any liabilities or obligations incurred by the business. The limited partners receive a share of the company's profits and may contribute their own funds to support the business, but are not responsible for liabilities. As such, their status may be relegated to non-managerial decisions. 

Which is best for your business?
To determine whether your business should be an LP or an LLC, first consider your role in the prospective company: Are you a sole proprietor? Are you looking to manage the business largely on your own, investing your own resources sporadically? If that is the case, an LLC will offer you the ability own your own business while protecting your personal assets. However, it will require the filing of certain state and federal tax paperwork and compliance with regulations – which may prove difficult to navigate without the help of a skilled business attorney.

On the other hand, if you aim to be more of a silent partner in a business managed by another, a limited partnership may do the job. Partnerships often do not require filing formal paperwork or paying special fees, making them simpler to form and manage. 

Still not sure what is the best legal structure for your business? Call The Law Offices of Donald W. Hudspeth, P.C. We would be glad to help.

Categorised in: Arizona LLCs, Asset & Liability Protection, Business Law, Dissolution & Partnership Disputes, Starting a Business in Arizona

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