It can be confusing to distinguish between a Limited Partnership and a Limited Liability Partnership. The basic distinction between the two is where the liability falls. In a Limited Liability Partnership, all of the partners have limited liability. In a Limited Partnership, at least one of the partners is a general partner while all of the others can have limited liability.

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Creditors and lending institutions tend to prefer working with Limited Partnerships rather than Limited Liability Partnerships, primarily because in a Limited Liability Partnership, they can only reach the business assets. In a Limited Partnership, creditors can reach all of the personal assets of the general partner so long as they follow appropriate measures. The general partner in this partnership bears the brunt of the risk, but he or she also gets most of the power. In most states, limited liability partners in such a relationship cannot be as actively involved. They cannot commit the general partner to an agreement, and they cannot make the primary decisions for the business. In some states, this partnership is known as a silent partnership. The law provides significant limitations on the limited partners primarily because they do not have the same risks. Additionally, it prevents the limited partners from having all of the benefits.

The partnership itself can only be formed through an express Partnership Agreement. In addition to complying with state laws, that agreement must also specifically identify the partners and their roles within the partnership. The general partner has to be named, though in some states, the limited liability partners can be added at a later date. When it comes to filing taxes though, the partnership is taxed as a General Partnership. The one exception is for the limited liability partners who do not have to pay the taxes at the self-employment rate because they aren't considered active in the business. 

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