LLC vs Partnerships

Starting a business requires research, especially when it comes to the business type you want to run. Two popular business structures are limited liability companies (LLCs) and partnerships. 

Both LLCs and partnerships are set up by registering with your home state. However, the two models have significant differences that may make one type more appealing than the other, so consider the following information before making your decision. 

What is an LLC?

Definition

An LLC is a legal entity that limits the amount of personal liability its members (owners) have, including any debts or lawsuits the business is dealt. In these cases, the owners won’t have to use personal funds to settle the liabilities. 

Taxes

LLCs are also known as “pass-through” entities. This means LLC members have the option to claim the company’s profits or losses on their personal tax returns. These reasons make LLCs an attractive model for potential business owners, especially for those going into it alone. If there’s more than one member and it’s a domestic LLC, then it’s classified as a partnership for federal income tax purposes. 

Formation

LLCs are formed at the state level, typically with the state’s Secretary of State. To formally establish the LLC, you’ll need to draft and file Articles of Organization or a Certificate of Formation with the state where you plan to do business. Creating an Operating Agreement should be considered along with appointing a registered agent and applying for an employer identification number (EIN). 

If you’re looking to form an LLC but want to skip the hassles of dealing with it on your own, then we can help. 

What is a Partnership?

There are four types of partnerships: the limited liability company (LLC), the general partnership (GP), the limited liability partnership (LLP), and the limited partnership (LP). 

We’ve already discussed the LLC, so let’s look at the other three. 

General Partnerships 

Definition

A general partnership involves two or more people going into business together. 

Liability

They all share the company’s assets, liabilities (legal and financial), and profits. In GPs, all partners agree to have unlimited personal liability. This means they can each face lawsuits or have their personal assets taken to cover the company’s liabilities (like debt). 

Taxes

The general partners must also include earnings from the partnership when they file personal income tax returns. 

Additional GP information: 

• GPs have flexible business structures. They allow owners to make any decisions relating to how the company operates. 
• They’re also easier and less expensive to form. You won’t be required to register a formal document with any government agency. 
• It’s highly suggested that the partners draft a written partnership agreement. 

Ready to form yours? Here’s how to form a general partnership.

What are Limited Liability Partnerships (LLPs)?

Liability and Management

A limited liability partnership offers limited liability to each owner for their income and personal assets, depending on the jurisdiction. LLPs are  known for being low-risk since one partner’s actions won’t affect the others. Resources like experience, office space, clients, and more can be shared as well. 

LLPs are similar to LLCs, but the governing document it uses is a partnership agreement instead of an operating agreement. 

Taxes

With taxes, an LLP allows every partner to claim company profits on their personal tax returns. LLPs are also known for their flexibility by allowing partners to come and go, making them popular with professional groups like small law firms and consulting groups. 

Formation

If you plan to form an LLP, you’ll need to register it with the state where you plan to do business. Forms should be filed with the Secretary of State’s business division or similar office. Costs vary by state. 

What are Limited Partnerships (LPs)?

Definition

A limited partnership includes at least two people with one being a “general partner.” This person holds unlimited liability and is responsible for running the company. A “limited partner,” as the name suggests, has limited liability along with less control over the company and profit limits.

Taxes

All partners, however, must pay personal income taxes on all company profits. That said, only the general partner is required to pay self-employment taxes as well.   

You can form an LP if others want to invest in your company and share any profits, but other people have a limited role in the company’s operations. 

Formation

Forming an LP requires filing the appropriate documents with your state’s Secretary of State. There will be a filing fee, and if you plan to operate outside of the state, you’ll need to seek the help of a professional. 

What are the differences between LLCs and Partnerships? 

Now that we’ve gone over the basics of each business model, let’s briefly explore what makes LLCs and partnerships so different. Although an LLC is a type of partnership, there are some things to know before deciding which model is best for your business. This is especially important if you’re weighing the pros and cons of LLCs and partnerships. 

LLC and Partnership Differences 

Here are some key takeaways when it comes to the differences between LLCs and partnerships:

• Taxes: With taxes, LLCs and partnerships are pass-through entities. Keep in mind, though, that taxation factors may differ depending on the type of partnership. Be sure to speak with a licensed professional for any tax-related matters. 
• Registering: Registering your business with the state is a must unless you’re forming a general partnership. Fees will vary depending on the state and type of business you’re going with. 
• Filing: Paperwork for registration and taxes will also depend on the business type. For example, an LLC will have an operating agreement whereas a partnership will have a partnership agreement. 
• Stocks: Like stock shares, interests for LPs are classified as securities, making them subject to securities laws. However, partnerships won’t have to abide by these laws if they have less than 10 limited partners that are known to them and reside in the same state. In some states, that number can be as high as 35. An LLC, however, cannot issue shares of stock. 

Can an LLC be a partnership?

Yes, LLCs can be partnerships as they can be owned by more than one member. These owners also have the option to elect how they want the business to be treated by the IRS.

Domestic (within the U.S.) LLCs with more than one member will automatically be recognized as a partnership for tax purposes.

Can an LLC have two owners?

Yes, an LLC with two or more members is known as a “multi-member LLC.” This entity is similar to a single-member LLC in that it combines the flexibility of a partnership with the limited liability of a corporation.

How can we help? 

Now that you’re better informed about the differences between LLCs and partnerships, you can make a decision on which is best for you. When you’re ready to form your LLC or other business entity, you can rely on us to help you along the way.