LP and LLP
Partnerships with liability shields: an LP's for its limited partners only, an LLP's for every partner.
Two partnership variants a founder meets mostly from the other side of the table. A limited partnership has at least one general partner, fully liable, and limited partners who are not. A limited liability partnership gives limited liability to every partner. Both file Form 1065 like any partnership.
The tax difference that matters is self-employment tax. A limited partner's share of income is kept out of net earnings from self-employment, apart from guaranteed payments for services. A general partner's is not.
Limited partnership (LP)
- Good at
- Passive investors' liability is limited.
- Limited partners' shares stay out of self-employment earnings.
- Watch for
- The general partner stays personally liable.
- Limited partners trade control for their protection.
- Best for
- Pooled investment vehicles with a manager and passive investors.
Limited liability partnership (LLP)
- Good at
- Every partner's liability is limited.
- Partnership taxation.
- Watch for
- State law decides who may form one.
- Still a partnership: K-1s and Form 1065.
- Best for
- Professional firms whose state law allows them to use it.
Where this lesson's rules come from
The sources behind this lesson's requirements, by kind. Background reading explains; it is never the authority for a rule. Anything marked as a convention is ours, not the rule-maker's.
- Federal statute
- 26 U.S.C. §1402(a), (a)(13) (opens in a new tab)Net earnings from self-employment include a partner's distributive share — except a limited partner'sFree to read
- 26 U.S.C. §512(c)(1) (opens in a new tab)A tax-exempt investor's share of a partnership's business income is unrelated business incomeFree to read
- Federal agency guidance
- SBA, Choose a business structure (opens in a new tab)Choose a business structure — the SBA's overview of the optionsFree to read
- Background reading — not an authority
- Wikipedia, “Limited partnership” (opens in a new tab)Limited partnershipFree to read
- Wikipedia, “Limited liability partnership” (opens in a new tab)Limited liability partnershipFree to read
The words this page teaches
Each links to its glossary definition, which also names the authority behind it and the components that render it.
- Limited partnershipA partnership with at least one general partner who carries unlimited liability and limited partners whose liability is limited. A limited partner's share of income is kept out of self-employment earnings, apart from guaranteed payments for services
- Limited liability partnershipA partnership that gives limited liability to every partner, not only the limited ones. Formed under state law, which sets who may use it
- General partnershipTwo or more people carrying on a business together for profit without forming another entity. Each partner is personally liable for the partnership's debts; it files Form 1065 and pays no income tax itself