Posted by Assure ● Jun 9, 2020 10:32:29 AM
Limited Liability Corporations (LLCs) and Limited Partnerships (LPs) share many of the same beneficial characteristics in that they are both flexible in how they are used, and both provide pass-through tax treatment.
Although LLCs and LPs are very similar, it is not uncommon to hear the questions, “Should I use the LLC or LP structure?”. Typically, the answer is: You can use either to accomplish what you need, but many times an LLC is the preferred entity for a Special Purpose Vehicle (SPV). It is important to keep in mind the key differences between an LLC and LP as you make this decision.
A limited partnership has two types of partners; one or more general partners, and at least one limited partner. The general partners have control over the day-to-day operation of the business and make key decisions, and as such, have unlimited personal liability for the debts and obligation of the SPV. To get around the personal liability as a general partner, it is very common for an LLC to serve as the general partner of an LP. In an LP, the limited partners cannot have any control over the day-to-day operation of the entity. In exchange for the limited decision making, the limited partners cannot be held personally liable for the debts or obligations of the SPV. Unlike an LP, an LLC can either be managed by its members or by a manager. In either scenario, no member will be held personally liable for the debts and obligation of an SPV simply by participating in the management of the SPV.
Depending on the jurisdiction where you plan on doing business, an LP might be the best option because not every country recognized LLCs yet. For example, if an SPV in the US is planning on doing business in Canada, then it is likely the better choice to use the LP structure because it is recognized in Canada. Why do some investors want to invest into a Limited Partnership? We often hear from investors or SPV organizers that they want to setup an LP and not an LLC. This is often because historically an LP is used for venture and private equity funds, so they think this is the preferred entity to use. The reality is that an LLC often provides more flexibility in structure and provides all the same benefits on an LP.
Some investors like to invest in LPs because they want to be passive investors, and the LP provides that, but an LLC can provide the same level of protection to investors that an LP does by setting up a manager managed LLC. A manager managed LLC will grant the day-to-day operations to the manager, and a limited role to the LLC members similar the that of limited partners.
Although most venture capital and private equity funds are set up as LPs, most SPVs are set up as LLCs. SPVs are a relatively new investment vehicle in the venture space, but they have been used for years in real estate. In real estate, SPVs are often referred to as “single-purpose entity” or an “SPE.” An SPE is formed for the sole purpose of holding title to real estate. It has no other assets or liabilities unrelated to the piece of real estate. Using SPVs to invest in companies utilizes that same structure. The SPV makes one investment and is formed solely for that purpose. Although LLCs are common when holding one asset, there is no reason why to use an LP over an LLC to hold multiple investments other than familiarity from investors with LPs. An LLC provides the benefits of limited liability to all members and not just limited partners and is universally accepted in all 50 states.