LLC Vs Limited Partnership: Which Is Better For Commercial Real Estate In 2025?

There’s a reason so many investors choose LLCs. Over 70% of all partnership tax filings in the U.S. were tied to limited liability companies in 2022. That’s not just a stat. It’s a clear signal.

The flexibility, personal liability protection, and control offered by LLCs make them a go-to choice for structuring commercial real estate deals. However, from our experience, that doesn’t mean they’re always the best fit.

Many investors still lean on limited partnership models, especially when the goal is to bring in passive investors while keeping day-to-day decisions in the hands of a general partner.

If you’ve ever wondered how LLC vs limited partnership commercial real estate strategies compare, or which one makes more sense for your next property, this guide is for you.

We’re breaking down everything from liability protection to tax benefits, so you can choose the right business structure with confidence.

If you’re exploring your options, this guide ties into our previous piece on real estate crowdfunding investment structure, which looked at pooling capital from multiple investors.

After this, we’ll tackle tenancy in common structures for 1031 exchanges to explore tax-deferred swaps.

For a broader view, check out our pillar content on commercial real estate investment structures, where we walk through all the major models investors should know.

Let’s get started!

Short Summary

• LLCs and limited partnerships are both popular structures for commercial real estate investment, each offering unique benefits.
• LLCs offer strong personal liability protection, flexible management, and are easy to scale with multiple members.
• Limited partnerships separate control and liability, giving general partners authority and limited partners a passive income role.
• Tax benefits, filing requirements, and ownership flexibility differ between the two and can impact long-term returns.
• Choosing between LLC vs limited partnership commercial real estate depends on your investment goals, partner roles, and risk tolerance.

Understanding LLCs And Limited Partnerships In Commercial Real Estate

When you’re structuring a commercial real estate deal, picking between an LLC and a limited partnership can have a real impact. Not just legally, but financially too. Let’s walk through how each business structure works, and where they tend to shine.

What Is A Limited Liability Company (LLC)?

A limited liability company is a flexible legal entity that blends the protection of a corporation with the simplicity of a partnership. It’s often the first choice for investors who want personal asset protection without heavy bureaucracy.

A lot of investors use LLCs to hold separate properties, like one for each multifamily unit, to keep business debts isolated. That’s a move worth considering, especially for higher risk businesses or properties needing major repairs.

In most states, LLC members aren’t held personally liable for the debts or legal issues tied to the property. That means your home, car, and savings accounts stay safe if something goes sideways on a deal.

How Limited Partnerships Are Structured

A limited partnership includes at least two types of partners: the general partner, who manages day to day operations, and one or more limited partners, who act more like silent partners.

The general partnership side comes with unlimited liability, while limited partners typically enjoy limited personal liability as long as they stay out of the weeds.

For instance, in real estate syndications, we’ve seen setups where the sponsor operates as the general partner, managing the asset, while the passive investors come in as limited partners. That’s a clean way to raise money without sharing control.

Evolution Of These Structures In Real Estate

These partnership business structures have been used in real estate for decades, but the shift toward limited liability company LLC setups grew rapidly in the ’90s and early 2000s.

Today, nearly every commercial real investor we meet has used or at least explored an LLC versus limited partnership setup at some point.

State laws vary, though. Some states have lower filing fees and better regulatory compliance rules for LLCs, while others still favor limited partnership agreements.

Always check local guidelines before locking in your structure.

Matching Structures To Asset Classes

For retail centers and office buildings with lots of moving parts, an LLC offers more management flexibility.

For long-term equity in large apartment portfolios, limited partners in a partnership agreement model may make more sense.

If you’re structuring a deal with multiple co owners but only one will actively manage it, the limited liability partnership route could work well.

Choose the structure that aligns with your ownership structure, investment goals, and how hands-on you plan to be.

Key Differences In LLC vs Limited Partnership Commercial Real Estate

Taxes is a huge factor when choosing between an LLC vs limited partnership commercial real estate setup. However, it also depends on how much control you want, how much risk you’re taking on, and how easy it is to raise funds.

Let’s break down the practical differences we’ve learned from real deals and investor setups.

Liability Protection: Where The Risks Lie

LLCs offer personal liability protection. That means if the business is sued or defaults on a loan, members’ personal assets like homes and cars aren’t at risk.

In a limited partnership, the general partner faces unlimited liability. They’re on the hook for the full brunt of any company debts.

Limited partners, on the other hand, have limited personal liability, but only as long as they don’t participate in business activities.

We’ve seen setups where the general partner uses a separate limited liability company just to hold their GP interest. Now that is a smart way to shield significant personal assets.

Management Structure: Who Runs The Show?

In an LLC, management can go two ways:

• Member-managed LLCs: All LLC members participate in running the business. This works for smaller groups who like shared control.
• Manager-managed LLCs: Only appointed LLC owners handle decisions. Everyone else stays passive.

In a limited partnership:

• The general partner oversees the day to day operations.
• Limited partners are passive investors. They don’t manage anything but still benefit from returns.

For example, in a hypothetical multifamily deal, one group might use an LLC for hands-on rehab work, while another might lean on a limited partnership structure to attract out-of-state silent partners.

Raising Capital And Ownership Flexibility

• LLCs offer more ownership structure flexibility. You can split percentages however you like.
• Limited partnerships are often easier for large capital raises with multiple passive investors, especially in syndications.

If you’re raising from friends and family, LLCs keep things clean and easy. For bigger projects or fund-style investing, partnerships may be better suited.

Documentation And Legal Agreements

• LLCs operate with an operating agreement. This spells out roles, profit splits, voting rights, and more.
• Limited partnerships use a limited partnership agreement, which defines each partner’s role and responsibilities.

It’s crucial to have these documents reviewed, especially when co owners are involved. Misunderstandings happen when expectations aren’t clearly written out.

Reporting and Regulatory Compliance

• LLCs generally have simpler regulatory compliance requirements. In some states, annual filings are minimal.
• Limited partnerships may have stricter rules depending on their structure and state laws.

Both must keep detailed records, but LLCs often have fewer reporting requirements.

Pro tip? Always factor in state-specific rules on filing fees, especially if you’re forming entities in multiple states.

Tax Implications And Financial Considerations

When deciding between an LLC vs limited partnership commercial real estate structure, the tax angle matters just as much as management and liability. We’ve seen investors save thousands just by choosing the right setup and avoid surprise tax bills.

Pass-Through Taxation And IRS Treatment

Both LLCs and limited partnerships are typically taxed as pass-through entities under the Internal Revenue Code. That means the business itself doesn’t pay income tax.

Instead, profits and losses flow directly to the owners’ personal tax returns, avoiding corporate-level tax.

Still, the IRS allows flexibility for LLCs. They can choose to be taxed as a C corporation or an S corporation if it suits their goals. That can help with self-employment taxes or reinvested earnings.

Avoiding Double Taxation

In most setups, LLCs don’t face double taxation.

But if an LLC elects C-corp status, which might happen to access certain fringe benefits, profits can be taxed twice (once at the corporate level, and again when distributed to members).

Limited partnerships don’t run into this unless they’ve added a corporate general partner. That’s rare, but it happens in complex funds.

Debt And Tax Filing Logistics

For both structures, business debts aren’t passed on to limited partners or members personally, but they do affect the tax basis.

Each partner or member reports their share of income, losses, and deductions on personal income tax returns, so keeping good books is a must.

For instance, an investor in, say, a retail strip center might use a limited partnership and pass along depreciation losses to limited partners. This action reduces their taxable income, even without cash distributions.

Federal Tax Nuances And Maintenance Costs

Some states hit LLCs with higher annual filing fees, while limited partnerships tend to have lower ongoing costs.

Tax advantages like depreciation, cost segregation, and interest deductions apply to both structures in commercial real estate.

Choosing between S corp vs C corp elections for an LLC really depends on how profits are used and how owners are compensated.

Pro tip: Run the numbers annually with a tax pro, especially if your commercial real estate assets start generating serious passive income. Rules shift, and what worked last year might not be ideal today.

Management And Control: Who Makes Business Decisions?

The choice between an LLC vs limited partnership commercial real estate setup is also about control, and not just liability and taxes.

Get to know who’ll call the shots beforehand. This way, you can help you avoid unnecessary friction and keep your investments running like a well-oiled machine.

Overview Of Management Roles In LLCs

In a limited liability company, the management setup is flexible, and that’s one of its biggest perks.

• In a single-member LLC, there’s complete control. One person makes every decision, making it easy and straightforward.
• For multiple LLC owners, you can opt for either member-managed or manager-managed structures. In a member-managed setup, everyone chips in on business decisions.
• In manager-managed, the owners pick someone, either one of the LLC members or a third party, to run the show.

This flexibility is why we often see newer investors lean toward LLCs. You’re not boxed into one structure, and the operating agreement lays everything out clearly.

Management Structure In Limited Partnerships

With a limited partnership, the roles are more rigid. You’ve got:

• A general partner who handles the day to day operations and has full decision-making authority.
• Limited partners, who are usually passive investors. They provide capital but don’t get involved in the nitty-gritty, unless they want to risk their limited personal liability status.

In a situation where, say, two family members invest together, one runs the business activities while the other funds it and steps back. This structure can work well in this situation.

Handling Disagreements And Responsibilities

Disputes between business partners happen. For LLCs, your operating agreement outlines how to resolve conflicts. For partnerships, that’s handled through the limited partnership agreement or partnership agreement.

That’s why it’s always important to spell out who decides what before things get messy.

A few more things to keep in mind:

• A registered agent is required for both structures. This person or service handles legal documents and keeps things compliant.
• In partnerships, since at least one partner has unlimited liability, there’s more risk in power struggles. That’s something to weigh carefully if you’re not the one holding the reins.

Compared to a sole proprietorship or a corporation, both LLCs and limited partnerships offer more nuance. You get more protection than going solo, and more control options than a traditional c corporation setup.

Final Thoughts

Choosing between an LLC and a limited partnership for commercial real estate comes down to how much control, liability protection, and flexibility you need. There’s no one-size-fits-all answer, but now you’ve got a clear sense of what each structure offers.If you’re still weighing your options or need help figuring out what fits your situation best, we’re always here to help. Head over to our homepage to learn more and connect with our team.