Why Are the LLC and the Limited Partnership the Two Main Characters?

Before we dive into the LLC or limited partnership dilemma, let’s clear something up. In Hungary there are four company forms, yet most new entrepreneurs essentially choose between just two. What happened to the other two?

One is the general partnership. In terms of cost and operation, this form is almost identical to the limited partnership. There is one essential difference. In a general partnership, every member is liable without limit for the company’s debts with their own assets. In a limited partnership, at least one member escapes this risk. Because of this, almost no one sets up a general partnership, since if I can get a safer form for the same price, why would I choose the riskier one? In practice, then, the general partnership has all but died out.

The other is the company limited by shares. This is fundamentally not a company form for start-ups, unless you have significant capital and secure orders. It requires much more money, and creating and managing shares means unnecessary extra cost and administration. LLCs typically convert into companies limited by shares when an investor comes on board, because at that point this more flexible form starts to matter. But that is a later stage of life, not the beginning.

So the real question remains. The LLC or limited partnership contest, which is what I am trying to help with here.

It is worth understanding why liability became the main organizing principle. When someone sets up a company, the most important risk question is what happens if the business does not work out. Do they lose only what they invested, or is their own savings, perhaps even the family flat or house, also at stake.

The four company forms essentially lie along this axis. In a general partnership everyone risks everything, in a limited partnership some do and some don’t, in an LLC no one risks their private assets, and the company limited by shares offers the same protection, just at much greater cost and complexity. Once you understand this logic, it is immediately clear why the LLC and the limited partnership are the two common choices for most start-ups.

The Limited Partnership, or Its True Face

Let’s start with the limited partnership, because it is surrounded by the most myths. Many people think the limited partnership is some lower-grade, shoddier company form than the LLC. This is not true. The limited partnership is not worse than the LLC, it is simply different. It has advantages and disadvantages, exactly like the LLC does.

The essence of the limited partnership is that it has two kinds of members. The general partner, who is liable without limit for the company’s debts with their own assets too. And the limited partner, who only risks as much as they put into the company. If five forints, then five forints. It requires at least one general partner and one limited partner, so you cannot set up a limited partnership alone. This is the first important thing to know.

It is worth knowing that, legally, largely the same rules apply to the limited partnership as to the general partnership, only the existence of the two kinds of members makes it different. This duality gives the limited partnership its true character. The general partner is the engine and the responsible party of the company, while the limited partner is typically more of a silent investor who puts in money or assets but does not carry the risk on their shoulders. Of course, this is only the default rule, and it can be departed from.

The Disadvantages of the Limited Partnership

Let’s look honestly at the weaknesses. It cannot be founded alone, it needs at least two people. The general partner bears unlimited liability, so if the company collapses, their private assets are also at risk. Managing the company can become cumbersome if the members fall out, because by default everyone has an equally weighted say, regardless of how much each put in. Because of this, the partnership agreement is harder to amend. On top of that, not every activity can be carried out as a limited partnership, certain regulated professions are excluded.

The Advantages of the Limited Partnership

But let’s not paint the limited partnership all black. It can be founded with little capital, there is no set-in-stone minimum amount, which matters a lot at the start. In cash, ten forints are needed to found it, but with share capital paid by bank transfer it can be set up with as little as two forints. Certain more favorable tax arrangements are available with it. And if someone wants to leave, they can do so relatively simply, by giving notice, which is not so easy with an LLC.

Who Do I Recommend the Limited Partnership To?

The limited partnership is best suited to small family businesses, where the members trust each other and a serious conflict is unlikely. It can also be a good choice for newly started, low-risk ventures. In special cases it can be fitted into the structure of a larger corporate group, but that is already an advanced level.

The Question of General Partner Liability, Which Many Underestimate

If only one aspect could be singled out in the LLC or limited partnership decision, it would be liability. Yet many people wave it away at founding, because in the excitement of the moment no one thinks that the company might one day run into trouble.

Let’s look at what this means in reality. Suppose you set up a limited partnership as a general partner, and the company takes on a larger order for which it buys raw materials on credit. If the customer does not pay, and the company cannot pay the supplier, then the supplier does not stop at the company’s assets. As a general partner, you are liable for the debt with your own assets too. In practice this can mean that your personal savings, or even your real estate, is at risk.

The same situation looks different with an LLC. There, the member as a rule only loses what they invested in the company. The creditor cannot reach their private assets, except in a few exceptional, near-criminal cases, for example if the member used the company abusively. This is why I always say that limited liability is not a luxury, but a shield whose value people usually only understand when they already need it.

But again, this does not mean the limited partnership is bad. For a low-risk activity, where there are no large debts and no large orders, the real risk of general partner liability is small. But for a larger-scale or riskier business, this aspect alone can settle the LLC or limited partnership question in favor of the LLC.

The Limited Liability Company, the LLC

Now let’s turn to the other company form. The LLC is the real jack-of-all-trades of Hungarian company law, by far the most common and most popular company form. And not by chance.

The essence of the LLC is in its name. Limited liability. This means the members are liable only up to the value of the assets they put into the company. If the company goes bankrupt, the member may lose what they put in, and the company’s assets, but their own flat, car, and savings are as a rule not at risk. This is a huge advantage compared to the general partner liability of the limited partnership.

It is worth knowing that under the law an LLC requires at least three million forints of share capital, roughly 7,500 euros. This sounds frightening at first, but there is good news. Paying in the cash contribution can, under certain conditions, be stretched out, and can even be met later from the company’s profit. So you do not necessarily have to put three million on the table on day one.

The Disadvantages of the LLC

The LLC is not perfect either. It requires a bit more capital to set up. Although the payment can be stretched out for a while, sooner or later the capital situation has to be settled. If it is not settled, you either have to convert into a limited partnership or close the company down. And what may surprise many, you cannot leave an LLC as easily as a limited partnership. If someone wants to part with the company, they have to sell their business share or settle the situation some other way, which is more complicated than a simple notice of termination.

The Advantages of the LLC

The advantages, however, are weighty. It can be founded alone, so if you are thinking of a one-person business, this is a viable route. It is an extremely flexible form, which can be shaped in many ways to the members’ needs. Limited liability protects private assets. The voting proportions can be adjusted to the capital put in, so whoever contributes more can have a greater say, which gives better control over the fellow members. And almost every small and medium-sized business activity can be carried out in LLC form, there are none of the limits that apply to the limited partnership.

What About Taxation and Costs?

Many people think the LLC or limited partnership choice is primarily a tax question. In reality, taxation is more of a secondary consideration, but it should not be ignored either.

The truth is that the tax arrangement is largely independent of whether you set up an LLC or a limited partnership. Most tax options are available with both forms, though there are minor differences. The exact picture, however, changes often as tax rules are amended, so it is always worth checking this according to the current rules, preferably in consultation with an accountant.

In terms of costs, founding is broadly similar for the two forms. The biggest difference is the LLC’s share capital, three million forints, compared to the limited partnership’s more flexible, lower capital requirement. As I mentioned, paying in the LLC’s share capital can be stretched out, but the obligation still exists, and it is worth reckoning with this realistically, not just waving it away at founding.

LLC or Limited Partnership, So Which Should It Be?

And here comes the answer you probably do not want to hear. It depends.

There is no such thing as one of the LLC or limited partnership being objectively better. Both can be an excellent and a catastrophic decision, it depends solely on your specific situation. The choice depends on many factors. Who are you going into business with, how much do you trust them? What activity will you carry out, and how much risk does it involve? How much capital are you starting with? Are you going it alone, or with partners? Do your plans include expansion, bringing in an investor?

For a lone freelancer working at low risk, even a one-person LLC can be perfect. For two siblings opening a small family food stall with minimal capital, the limited partnership may be more logical. For a higher-risk venture involving several partners, the LLC’s limited liability is almost indispensable.

One more thing worth considering is your future plans. The company form is not forever, you can convert later, a limited partnership can become an LLC, an LLC a company limited by shares. But every conversion costs time, money, and administration. So if you already sense that your business will grow quickly, that you want to bring in an investor, or that you are going into a higher-risk business, it is worth starting with the more flexible, more protected LLC from the outset, even if it costs a bit more at first.

The point is that this is not a matter for a template answer. The bad news is that there is no universal recipe. The good news is that this is exactly why it is worth talking it through with a professional who can give advice tailored to your specific situation.

Summary

So there is no simple, one-size-fits-all answer to the question of the two company forms. The limited partnership can be good for low-risk ventures starting with little capital, typically family or friendly businesses, but in return the general partner is liable with their private assets too. The LLC is more flexible, can be founded alone, and is safer thanks to limited liability, but it means a bit more capital and a more complicated exit.

The right decision depends on your goals, the available capital, your partners, and the planned activity. A wrong choice of company form can be corrected later, but that always costs time and money. It is much cheaper to start with the right form straight away.

If you would like to find out which of the two company forms is the better choice in your situation, feel free to get in touch. In a short consultation we will review your plans, and together we will find the company form that fits your goals, before you finalize anything.

Do not leave your company’s future to chance. If you are uncertain about choosing the company form, book a consultation, and together we will select the solution that suits you best.