The Default You Get by Accident Is the One With No Shield
Before comparing three forms, it is worth naming the fourth, because it is what you already have if you and somebody else have started a business and filed nothing. The IRS describes a partnership as the relationship between two or more people to do trade or business. State partnership law reaches broadly the same conclusion, and section 202(a) of the Revised Uniform Partnership Act is the text most states copied: two people carrying on a business for profit are a general partnership whether or not either of them meant to create one. No filing, no fee, no agreement required.
Two features of that default do the damage. Each partner is an agent of the partnership, so a commitment one of you makes in the ordinary course binds the firm. And the partners are personally liable for the firm's obligations. That means a claim the business cannot pay lands on whoever has assets.
The Small Business Administration puts it bluntly for partnerships generally: unlimited personal liability unless structured as a limited partnership. So the honest way to read this comparison is not as a choice between three good options. It is as three different escapes from one bad one.
If you are the only owner, this page is not your comparison. Start at LLC vs sole proprietorship. If the real question is whether outside investors will want stock rather than partnership interests, that belongs in LLC vs C corporation. What follows assumes two or more owners and a decision still open.
Four Structures, One Question: Who Answers Personally
| What you are asking about | General partnership | Limited partnership | Limited liability partnership | LLC |
|---|---|---|---|---|
| How it comes into existence | By conduct, with no filing | A certificate filed with the state | A registration filed on an existing partnership | Articles of organization filed with the state |
| Who is personally liable | Every partner | The general partner or partners | Depends on the state's partnership act | No member, by statute |
| Who may run it | Every partner | The general partner; limited partners stay passive | Every partner | Members, or managers they appoint |
| Who may own it | Anyone | Anyone | In several states, licensed practitioners only | Anyone |
| Governing document | A partnership agreement, if anyone wrote one | A limited partnership agreement | A partnership agreement | An operating agreement |
| Federal return | Form 1065 with a Schedule K-1 per partner | Form 1065 with a Schedule K-1 per partner | Form 1065 with a Schedule K-1 per partner | Form 1065 by default with two or more members |
| Self employment tax on the share | Yes, for every partner | General partner yes, limited partner generally no | Yes, for working partners | Contested for passive members, yes for working ones |
| Ongoing state filing | None in most states | Annual or biennial report in most states | Annual renewal in several states | Annual or biennial report in most states |
| Typical formation fee | None | $35 in Montana, $100 in Georgia, $110 in Delaware, $300 in Texas | Varies, and separate from the underlying partnership | $35 in Montana, $100 in Georgia, $110 in Delaware, $300 in Texas |
The row that decides most cases is the second one. Everything after it is administration.
Start your filing
We prepare it, file it with the agency, and confirm it came back accepted. Or keep reading and file it yourself; this guide covers both.
The General Partner Carries the Whole Thing
A limited partnership is defined by an asymmetry. The Small Business Administration describes the form as having only one general partner with unlimited liability, and all other partners have limited liability. That is the deal: money comes in from people who will not run the business, and one party accepts personal exposure in exchange for control.
Nobody actually wants that seat. That is why almost every seriously constructed limited partnership puts an entity in it. An LLC or a corporation is formed, funded thinly, and named as the general partner. So the unlimited exposure stops at that entity's assets rather than at a person's house. The arrangement is standard in funds, in real estate syndications and in film production.
It also doubles the paperwork: two entities to form, two sets of state filings, two registered agents, and a general partner entity that has to be respected as a separate company or the whole point of it collapses.
The limited partners have an obligation of their own. It is the one they most often break. Limited liability in an LP has historically been tied to staying out of management. Modern statutes in many states have softened the old control rule, but the partnership agreement and the state's own act still govern.
A limited partner who starts directing operations, signing for the firm or holding themselves out as running it is inviting an argument that they should be treated as a general partner. If the investors intend to be involved, an LP is the wrong container. An LLC with a manager is the right one.
The LLP Is a Registration, and Often Only for Licensed Practices
An LLP is not a fresh entity built from nothing. It is a partnership that has registered for a liability shield. That is why the paperwork usually reads as an application to register rather than a certificate of formation, and why the underlying partnership agreement continues to govern everything the registration does not. In California the document is an Application to Register a Limited Liability Partnership, Form LLP-1, filed with the Secretary of State.
The restriction that surprises people is who may use it. California registers a limited liability partnership only for the practice of public accountancy, the practice of law, the practice of architecture, the practice of engineering or the practice of land surveying. Several other states draw a comparable line. If your firm is a marketing agency, a contractor or a software shop, the LLP may simply not be available to you. The form that does the same job is the LLC.
The second thing to check is how far the shield reaches, because that is set state by state rather than nationally. In some states the LLP registration protects a partner from claims arising out of another partner's wrongful acts while leaving the ordinary contractual debts of the firm as a shared obligation. In others the protection is broader. Read your own state's partnership act, or ask counsel to, before treating an LLP shield as equivalent to an LLC's.
In either case, it never covers your own professional errors. That is what malpractice cover is for. The wider set of requirements a licensed firm carries, including firm level registration with a board, is set out in LLC and PLLC for professional services firms and what is a professional corporation.
A third practical point: several states require an LLP to renew its registration on a cycle of its own, separate from any annual report. Letting that lapse can drop the firm back to general partnership status, with the shield gone for the period it was unregistered.
Where a Limited Partnership Is Still the Right Answer
The LLC has taken most of the ground the LP used to hold, and it deserved to. Four situations still point the other way.
Pooled investment vehicles. Funds are built as limited partnerships because the whole market runs on the form: the documents, the capital account conventions, the carried interest mechanics and the expectations of institutional investors all assume it. Rebuilding that in an LLC is possible and pointless.
Passive investors who genuinely want to be passive. The LP draws a hard line between the person running the business and the people funding it. That line is easier to explain to a court than a carefully drafted manager provision in an operating agreement.
Family holding structures. Family limited partnerships are used to hold assets across generations, with a general partner keeping control while limited interests move to family members. The valuation and estate consequences are specialist ground and need a tax adviser. But the form is chosen deliberately.
An existing partnership with decades of agreements. A firm that has operated as a partnership since the 1990s, with buy-in terms, capital accounts and client ownership rules that everyone understands, may get more from registering as an LLP than from converting to an LLC and renegotiating all of it.
Outside those four, a new business with two or more owners is generally better served by the LLC, described in full in what is an LLC and filed as set out in how to start an LLC. The document that allocates profit, control and exit among the owners is covered in operating agreement essentials. It matters more than the choice of form.
Self Employment Tax Splits Along the Same Line
The liability split has a tax twin. It is the one genuine federal difference between these forms, and it is written into IRC 1402(a)(13), which excludes a limited partner's distributive share, as such, from net earnings from self employment while leaving guaranteed payments for services inside. The Form 1065 instructions state that a general partner must include in net earnings from self employment the partner's distributive share of partnership ordinary business income or loss, while a limited partner generally is not subject to self employment tax on a distributive share of partnership income.
Whether a partner counts as limited for this purpose turns on section 1402(a)(13) rather than on the label in the partnership agreement. Guaranteed payments for services are subject to self employment tax either way.
The rate is the same one every self employed person pays, and IRC 1401 imposes both halves of it: 15.3 percent, made up of 12.4 percent for Social Security and 2.9 percent for Medicare. The Social Security portion stops at the wage base, which the SSA sets at $184,500 for earnings in 2026. On a $150,000 distributive share, the difference between general partner treatment and limited partner treatment is real money. That is exactly why the IRS scrutinises partners who claim the limited label while working full time in the business.
Do not choose a structure to reach that outcome. A partner who runs the firm is not a limited partner because a document says so. The same argument arrives in a different costume for LLC members who take an active role. The tax treatment of an LLC's owners is worked through in the LLC taxes guide. Where an election is the better lever, the arithmetic is in when the S corp election pays for itself.
What Each One Files, and What the State Charges
Federally, these forms are the same animal. A general partnership, an LP, an LLP and a multi member LLC all file Form 1065 and issue a Schedule K-1 to each owner. None of them pays federal income tax at the entity level. The IRS is explicit that a partnership does not pay income tax, and instead passes through profits or losses to its partners. So the federal return is not a reason to prefer any of them.
At state level the picture differs. A general partnership usually files nothing to exist. An LP files a certificate with the state: in Texas that is a Certificate of Formation for a Limited Partnership on Form 207, filed with the Secretary of State on the same schedule as an LLC. An LLP files its own registration. In several states, it renews on its own cycle. An LLC files articles of organization.
On price, LP and LLC formation fees are identical in the File.Business fee table in every state: $35 in Montana, $45 in Arkansas, $50 in Arizona, $99 in Ohio, $110 in Delaware, $125 in Florida, $300 in Texas and $520 in Massachusetts. So cost is not a tiebreaker between them. The recurring number is where the states differ. Those figures are collected in franchise tax by state, alongside the deadlines in annual report deadlines by state.
If you are still choosing where to file at all, work through how to choose a state for your LLC first, because the answer usually changes the fee you are comparing.
Five Mistakes When Choosing Among the Partnership Forms
Mistake 1: Operating as a general partnership because nobody filed anything
This is the most common and the most expensive. Two people split revenue for eighteen months. One of them signs a supply contract, and the other discovers that their personal assets stand behind it. The fix costs a formation fee. Not making it costs whatever the largest unpaid obligation turns out to be. The registration process itself is covered in partnership registration.
Mistake 2: Naming a person as the general partner
If a limited partnership is the right form, the general partner should almost always be an entity. Naming an individual concentrates every claim against the partnership onto one household. It is also a decision that is difficult and expensive to reverse once investors are in and the agreement is signed.
Mistake 3: Limited partners who start managing
Signing for the firm, directing staff or presenting yourself to counterparties as the person in charge undermines the position the limited partner status depends on. Investors who want a say should be members of an LLC, where taking part in management costs them nothing.
Mistake 4: Assuming an LLP is available, and that its shield is absolute
Several states restrict the form to licensed practices, and the states that offer it do not all offer the same protection. Confirm both before building a firm around it, and never assume the registration covers your own professional negligence.
Mistake 5: Choosing the form and skipping the agreement
The state filing decides who a creditor can reach. It decides almost nothing about what happens between the owners: who can bind the firm, how profit is split when it is uneven, what a departing owner is paid, and who keeps the clients. That is the partnership or operating agreement. Firms that never wrote one are the ones that end in litigation.
Three Firms and the Form Each One Chose
Example one: two land surveyors in Sacramento
Marguerite Osei and Tom Bergstrom had practiced together for nine years as an unregistered partnership, billing about $780,000 a year between them with three staff. Land surveying is on California's list of practices that may register a limited liability partnership. So they filed Form LLP-1 and kept the partnership agreement they already had, including the capital accounts and the buy-in terms.
What changed was that a claim arising from one partner's work no longer put the other partner's personal assets behind it. What did not change was the malpractice cover, which is what actually answers a bad survey. Nor did the Form 1065 they had always filed.
Example two: a self storage syndication in Tulsa
Cobalt Yard Partners raised $3.1 million from nineteen passive investors to buy and reposition two storage facilities. The sponsor formed an Oklahoma LLC to sit as general partner and a limited partnership to hold the properties. That meant two formation filings rather than one, and two annual reports thereafter. The investors wanted no involvement in operations, and the sponsor wanted uncontested control. The LP drew that line more cleanly than a manager clause would have. The general partner entity is capitalised deliberately thinly. That is the whole reason it exists.
Example three: a brewery taproom in Asheville
Three friends opened a taproom. A family member told them a limited partnership would protect the two not working behind the bar. It would not have: all three intended to be involved in decisions. None of them wanted the general partner seat. They formed a North Carolina LLC for $125 with a $200 annual report, and wrote an operating agreement giving one of them day-to-day authority up to a spending limit. That got a statutory shield for all three. The form that seemed sophisticated would have concentrated risk on whoever drew the short straw.
What Unlimited Liability Costs: The Penalty in Dollars
The filing fee is a rounding error against the exposure it removes, and three numbers make that concrete.
A five year commercial lease at $6,200 a month is a $372,000 obligation. Signed by a general partnership, every partner stands behind all of it. A landlord pursuing the shortfall after an early exit chooses whichever partner is easiest to collect from. Signed by an LLC without a personal guarantee, the claim reaches the company. The difference between those two outcomes in Montana is a $35 filing.
A supplier balance behaves the same way. A firm that runs $85,000 of trade credit and then loses its largest customer has an $85,000 problem either way. Whose problem it is depends entirely on which box was ticked at the start. No insurance policy answers a trade debt.
Then there is the penalty that arrives even when nothing goes wrong. Every one of these forms files Form 1065. Revenue Procedure 2025-32 sets the amount used to compute the late filing penalty under section 6698 at $260 per partner per month for any return required to be filed in 2027. A four partner firm that files six months late owes $6,240 on a return that may report no tax at all. Partnerships miss this more than corporations do, because the return is easy to think of as informational.
Where to Read Next
If the LLC is where this lands, start at what is an LLC and then how to start an LLC. Write the operating agreement before the first shared client rather than after the first argument. If your firm is licensed, the professional entity overlay is in LLC and PLLC for professional services firms. If a partner is putting in money rather than time and someone has raised the idea of shares, read LLC vs C corporation. If the corporation is already formed, the election comparison is in C corporation vs S corporation.
If you are the only owner after all, LLC vs sole proprietorship is the right page, and if what you actually needed was a trading name, that is LLC vs DBA.
LP vs LLP vs LLC FAQ
What is the difference between an LP and an LLP?
An LP splits its owners into two classes: at least one general partner who runs the business and is personally liable for it, and limited partners who put in money and are not. An LLP does not split them. Every partner takes part in the business, and every partner gets whatever shield that state's partnership act provides. That is why an LLP suits a firm of equals and an LP suits a manager plus passive investors.
Can anyone form an LLP?
Not everywhere. Several states limit the form to licensed practices. California registers a limited liability partnership only for the practice of public accountancy, law, architecture, engineering or land surveying. If your business is not on your state's list, the LLC is usually the form that does the same job.
Is an LLC better than an LP or an LLP?
For most new businesses with two or more owners, yes, because it gives every owner a statutory shield without requiring anyone to hold the general partner role and without a professional license. The LP and the LLP earn their place in narrower cases: pooled investment vehicles and family holdings for the LP, licensed firms and long standing partnerships for the LLP.
Do I have a partnership if we never filed anything?
Probably. The IRS describes a partnership as the relationship between two or more people to do trade or business. State partnership law generally treats two people carrying on a business for profit as a general partnership whether or not they intended it. That is the version with no shield at all. Each partner can bind the others.
Do limited partners pay self employment tax?
Generally not on their distributive share. The Form 1065 instructions state that a general partner must include the distributive share of ordinary business income in net earnings from self employment, while a limited partner generally is not subject to self employment tax on that share. Guaranteed payments for services are subject to it either way.
Does a limited partnership need a corporation as its general partner?
It is not required. But it is the standard arrangement, because somebody has to carry unlimited liability and no human wants to. Putting an LLC or a corporation in the general partner seat means the exposure stops at that entity's assets, at the cost of a second entity to form, fund and maintain.
Which return does each structure file?
A general partnership, an LP and an LLP all file Form 1065. They also issue a Schedule K-1 to each partner. A multi member LLC does the same by default. The federal return is the same document in every case. So the choice among these forms is a liability and governance decision rather than a tax one.
Start your filing
We prepare it, file it with the agency, and confirm it came back accepted. Or keep reading and file it yourself; this guide covers both.
This guide is written from the official sources below. Fees, forms, and deadlines change. Confirm the current requirement with the agency before you file.
Disclosure. File.Business is a private filing service. We are not a government agency and not a law firm. We prepare and submit filings at your direction. Nothing on this page is legal or tax advice. Filing fees, deadlines, and statutory references are current as of the last-updated date shown above, and they can change. Confirm current requirements with the relevant state agency before you file.
