When you're starting a business, picking the right business structure is absolutely crucial for both legal and tax reasons. LPs and LLPs are two options on the table for small business owners, and while they are similar in some ways, there are big differences. It is important to understand these before you settle on one for your business structure.
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LP is short for limited partnership. Although this business structure was all the rage in the 1970s and 1980s, its has steadily declined in popularity. Under an LP framework, there is one central business owner -- called the general partner - who has complete personal liability for the business, and at least one limited partner, who has personal liability protection from the business activities. Only the general partner can manage the business. Limited partners are essentially investors. Their investment into the company is their only exposure in the business. They may lose that investment but they cannot be held responsible for other business debts accrued by the general partner. For tax purposes, each partner is allocated profits and losses along the lines of their initial investment percentage, unless the partnership agreement states otherwise.
Although an LP structure can be used for any business type, it is most commonly used for short term projects, like movies and theatre plays. They are also sometimes used to manage family estates.
LLP stands for limited liability partnership. This business structure is relatively new. It appeared on the scene in the 1990s and was added to federal business tax returns as a recognised structure in 1998. LLPs can only be formed when a business offers professional services by licensed practitioners who are also joint owners of the business. Medical, veterinary, law and dental practices are typically formed as LLPs. Profits and tax responsibilities are split between the partners in accordance with the rules set forth in the partnership agreement. All partners have limited liability for joint obligations incurred by the business, but they are not protected from the fallout from personal misconduct. For instance, a doctor in a practice can still be individually sued for malpractice.
For both LPs and LLPs, state law reigns supreme when it comes to setting up the business and the laws governing the business. Variations in state law can impact the tax situation for the LP and LLP as well as how far limited liability goes in protecting partners.
If you need help deciding which business structure is the right one for you, or if you're ready to establish your LP or LLP, contact the secretary of state's office in your state. The staff can provide you with advice and the required forms for setting up your business. You may also need a lawyer to help you draw up your partnership agreement. Your state's bar associate can help you find an attorney.
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