Establishing a business requires choosing an appropriate structure. This decision affects many aspects of the business, including liability, taxation, and complexity of formation. Two popular options are the Limited Liability Company (LLC) and the general partnership. Below is a comparison that may help determine which is more suitable for your business needs.
Key Differences Between LLCs and Partnerships
A limited liability company (LLC) is a business structure treated as a separate entity from its owners, known as members. LLCs offer better liability protection and more tax flexibility than a partnership. Members of an LLC report profits and losses on personal tax returns, but an LLC can elect to be taxed as a corporation, which some find saves taxes.
In contrast, a partnership has no separate legal entity from its partners. A general partnership requires just a written or oral agreement between partners, although formally registering the partnership provides more legal protections.
Establishing an Entity and Protection
Establishing an LLC requires completing a number of steps and formally filing your business with the state. LLCs protect personal assets – like your home and car – from business debts, with all members receiving liability protection.
A partnership is generally easier to form and may have a higher borrowing capacity when multiple partners are involved. However, only the responsible partners will be liable if things go wrong. A limited partnership requires at least two people or entities to be formed.
Flexibility and Tax Considerations
LLC operating agreements detail profit sharing, member contributions, admitting new members, and decision making. This flexible structure better defines member roles, with no need for a general partner, only member-managers and passive investors.
The type of business and state laws may influence whether a partnership or an LLC is more beneficial, particularly due to taxation complexity and regulations. Consultation with an accountant is recommended to navigate these complexities.
Conclusion
Regulations may vary based on states, but understanding the differences between limited partnerships and LLCs will help you determine which type is best suited for your business operations financially and legally. Evaluate ownership structure, liability protection, and taxation when deciding between an LLC and a limited partnership.