# LP and LLP

> Partnerships with liability shields: an LP's for its limited partners only, an LLP's for every partner.

Source: https://lopifi.com/learn/business-entity-types-explained/lp-and-llp
Part of: Lopifi — US GAAP books on autopilot, checked by a CPA (https://lopifi.com)

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**What is the difference between an LP and an 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](https://lopifi.com/md/glossary/limited-partnership) has at least one general partner, fully liable, and limited partners who are not. A [limited liability partnership](https://lopifi.com/md/glossary/limited-liability-partnership) gives limited liability to every partner. Both file Form 1065 like any partnership.

> “Limited partnerships have only one general partner with unlimited liability, and all other partners have limited liability. … Limited liability partnerships are similar to limited partnerships, but give limited liability to every owner.”

— [SBA, Choose a business structure](https://www.sba.gov/business-guide/launch-your-business/choose-business-structure), Choose a business structure — the SBA's overview of the options

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.

> “there shall be excluded the distributive share of any item of income or loss of a limited partner, as such, other than guaranteed payments described in section 707(c) to that partner for services actually rendered to or on behalf of the partnership”

— [26 U.S.C. §1402(a), (a)(13)](https://www.law.cornell.edu/uscode/text/26/1402), Net earnings from self-employment include a partner's distributive share — except a limited partner's

**Limited partnership (LP)**
- Pro: Passive investors' liability is limited.
- Pro: Limited partners' shares stay out of self-employment earnings.
- Con: The general partner stays personally liable.
- Con: Limited partners trade control for their protection.
- Best for: Pooled investment vehicles with a manager and passive investors.

**Limited liability partnership (LLP)**
- Pro: Every partner's liability is limited.
- Pro: Partnership taxation.
- Con: State law decides who may form one.
- Con: Still a partnership: K-1s and Form 1065.
- Best for: Professional firms whose state law allows them to use it.

LP against LLP.

**Use case — The fund on the other side of the term sheet.** Picture a venture fund organized as a limited partnership: its manager is the general partner, its investors the limited partners. When it invests in a startup, that matters for the startup's entity: a partnership can't be an S corporation shareholder, and a fund's tax-exempt investors would be taxed on their share of an operating partnership's business income. Both are part of why the startup is a C corporation.

## Where this page's rules come from

- [SBA, Choose a business structure](https://www.sba.gov/business-guide/launch-your-business/choose-business-structure) — Choose a business structure — the SBA's overview of the options (agency)
- [26 U.S.C. §1402(a), (a)(13)](https://www.law.cornell.edu/uscode/text/26/1402) — Net earnings from self-employment include a partner's distributive share — except a limited partner's (statute)
- [26 U.S.C. §512(c)(1)](https://www.law.cornell.edu/uscode/text/26/512) — A tax-exempt investor's share of a partnership's business income is unrelated business income (statute)
- [Wikipedia, “Limited partnership”](https://en.wikipedia.org/wiki/Limited_partnership) — Limited partnership (reference)
- [Wikipedia, “Limited liability partnership”](https://en.wikipedia.org/wiki/Limited_liability_partnership) — Limited liability partnership (reference)

- **Track:** [Entity types](https://lopifi.com/md/learn/entities)
- **Part of:** [The entity menu](https://lopifi.com/md/learn/business-entity-types-explained) — 3 min
- **Terms taught:** [Limited partnership](https://lopifi.com/md/glossary/limited-partnership), [Limited liability partnership](https://lopifi.com/md/glossary/limited-liability-partnership), [General partnership](https://lopifi.com/md/glossary/general-partnership)
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