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How does each structure work? What are the benefits of each one? Which is the right choice for you: an LLC or a partnership?
In this article we’ll answer all of those questions, covering:
- What an LLC is
- What a partnership is
- How each one works
- The benefits and requirements of each business structure
And everything else you need to know to make the best decision for your business moving forward.
If you’re pressed for time, we have a few key takeaways to help you make up your mind quickly!
- A general partnership is a business arrangement in which two or more business partners co-own a business and are equally responsible for its running, profits, debts, liabilities, and assets.
- An LLC is a company that is owned by one or more members but differs from a corporation in that it does not have shareholders.
- General partnerships do not confer any liability to partners.
- LLCs do confer limited liability protection.
Limited Liability Company (LLC)
An LLC is a business structure that creates a legal distinction between the business proper and its members.
Members can be anyone, individuals, other businesses, or other LLCs, and a sole owner can be in charge of an LLC as its only member.
An LLC is separate from its members so it provides limited liability protection. That means that the individual members are not able to be pursued by the LLC’s creditors.
This is one of the significant features that separates an LLC from a sole proprietorship.
LLCs do not have shareholders so they do not raise capital in the same way as a corporation does by floating shares on the open market.
Instead, the members share in the profits generated by an LLC. Since the owners of an LLC can be individuals or other businesses, it’s not uncommon to see businesses set up an LLC to trade in a specific market or location.
In this arrangement, the profits generated would funnel back to the owning member, whether that be an individual, a corporation, or another LLC.
General partnerships are business entities in which two or more co-owners are completely and equally responsible for the running of the business.
General partnerships are unincorporated, which is to say that they are not a corporation they only exist tied directly to their owners.
General partnerships are “pass-through” entities, which means that instead of paying corporate taxes as an entity itself the partners in a general partnership pay taxes on the profits and losses of their business on their personal returns.
General partnerships confer no liability protection, which means that should the partnership liquidate, the partners are personally liable for any outstanding debts or other liabilities of the business should it liquidate.
What’s the difference between an LLC and a partnership?
The primary distinction between a partnership and an LLC is the ownership structure.
An LLC has one or more members who are its owners, whereas a partnership is strictly two owners who each have an equal share of the business.
The other primary distinction is that an LLC confers liability protection on its members, meaning that the individual members are not liable to creditors.
This is because the LLC is legally separate from its members. In contrast, a partnership is not distinct from its two owners, which means that they have liability should anything happen to the business.
|Multiple Members, as few as 1 or as many as desired
|Strictly two owners
|Members retain ownership equal to their investment
|Both owners have an equal stake in the business
|Limited liability protection
|No limited liability protection
Benefits & Drawbacks
The major benefit of an LLC over a general partnership is that all-important liability protection.
A general partnership doesn’t confer that same protection, so it isn’t necessarily as secure as an LLC.
A general partnership requires a form of agreement. A written agreement is best as it outlines the responsibilities and structure of the general partnership – but in some states, a verbal agreement is considered valid as an operating contract.
A partnership also requires you to have a good relationship with your partner because you share equal decision-making.
How to choose between a partnership and an LLC
Partnerships and LLCs are completely different business structures and depend on how you intend to run your business and who will be involved.
You might need to make choices about the number of people involved in your business, whether you need to file the more complex LLC registration forms, or if you require liability protection.
LLC vs. Partnership: Which option is best for you?
Now that you understand the basics of an LLC and a partnership, you may want to make a choice between the two for your business.
While there is no correct answer as to which of these structures will work best for you if you are starting from scratch, there are some details that will help you make the right choice.
Choose an LLC if you are establishing your business with limited liability protection and are looking to operate your business as a business owner and less as a worker within the business.
This can also be a valuable choice if you’re starting a business with multiple other members.
Choose a partnership if you don’t need liability protection, and you are working with one other equal partner.
What is the difference in taxes between an LLC and partnership?
Both LLC and Partnership owners pay business taxes on their personal returns.
Why use a limited partnership instead of an LLC?
You may choose to use a limited partnership if you are working with a single partner who has an equal ownership stake, rather than multiple members who have ownership stakes equal to the amount they have invested into the business.
Is a husband and wife an LLC or partnership?
It could be either; a husband and wife could structure their business as either a partnership or an LLC.