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.
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.
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.
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.
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.
A general partnership involves two or more people going into business together.
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).
The general partners must also include earnings from the partnership when they file personal income tax returns.
Additional GP information:
Ready to form yours? Here’s how to form a general partnership.
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.
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.
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.
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.
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.
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.
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.
Here are some key takeaways when it comes to the differences between LLCs and partnerships:
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.
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.
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.
You choose the filing option and add-on services that fit your needs like expedited filing speed, Employer Identification Number (EIN), Registered Agent, and Worry-Free compliance.
Our team collects and files all the necessary paperwork with the State to form your business based on the plan and time-frame you select at checkout.
This process can take a few days or a few weeks depending on the filing speed you select and the State’s internal processes and formation backlog.
The documents include your business formation certificate and employer identification number (EIN) assuming you purchased that additional service.
Our registered agent and worry-free compliance services ensure your company is always in good standing with the state.
We use technology and automated processes to provide a fast and low-cost business formation service that meets your unique business needs. Our technology keeps our costs down and offers the most customized business formation experience online. The result is a fast, low-cost, personalized service for everyone in our community!
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Disclaimer: The content on this page is for informational purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
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