LLC vs Partnership: Pros and Cons of Working With Others
The legality of this shared business agreement can be declared as an LLC or partnership of various forms. All of these entities carry different legal and practical implications, like when it comes time to open a joint bank account.
In this post, we’ll examine the differences between llc’s vs. partnerships. Both are meant to divide responsibility and liability across partners of a corporation. However, to fully understand them, you should know the difference between a general partnership vs. llc’s as well.
Sometimes You Need a Helping Hand
Entrepreneurs across industries structure their companies as an LLC or partnership to distribute company ownership. Having a team to make decisions and claim responsibility for a company can offer members peace of mind. Plus, it provides legal protection if you encounter problems like a lawsuit or debt.
Your company’s taxation and liability structures will change depending on the type of partnership or LLC that you enter. Due to this, make sure you’ve selected the structure best fits your business needs.
What to Consider When Deciding Between LLC vs. Partnerships
Is your company better suited for an LLC or a partnership? Here are some questions and factors to consider before entering into a legal agreement.
- Are you comfortable being personally liable for business debts? If not, you’ll probably want to opt for an LLC rather than a partnership of any kind.
- Do you have business partners, or are you planning on operating as a sole proprietor? Having at least one partner is necessary to form a partnership.
- How committed are the various co-owners to your company? If there’s a lot of turnover in leadership, it could be easier to register as an LLC.
- Do you have substantial personal assets to offer if your company goes into debt? If not, it could cause you significant personal financial damage to enter into a partnership.
When it comes to partnerships, one distinguishing factor is that more than one company owner is required. A partnership can’t be formed by one entrepreneur, but instead must be formed by two or more partners.
The agreement between partners outlines the division of company shares. In addition, it shows the debt responsibilities of each partner should the company go into debt, which is usually equal. Keep in mind this means that personal assets can be claimed to repay company debts, which makes some company stakeholders uncomfortable.
A partnership is subject to taxation from the IRS, as it’s considered a taxing entity. However, the company taxes are actually paid by the partners rather than the company. This means that rather than your company getting taxed, individual partners will be taxed based on their portion of the company.
The benefits of entering into a partnership include the lack of required business structure. You’ll probably find far less paperwork and eligibility guidelines for a partnership than an LLC.
Overall, partnerships place the emphasis on different partners rather than the collective company. The company’s structure and the way it is taxed weighs heavily on the involvement of different partners. This makes it incredibly important to have reliable and trustworthy partners.
Types of Partnerships
There are different kinds of partnerships with different terms and conditions. Here are four different types of partnerships that your company might want to consider.
- General Partnership (GP)
Simple and easy to create, a general partnership is initiated simply by starting a business endeavor with a partner. It doesn’t even require filing. A general partnership doesn’t have continuing requirements annual meetings.
- Limited Partnership (LP)
In a limited partnership, one partner is deemed “general partner” while additional partner(s) have limited liability. This basically means that one partner is personally liable for business debts, while the limited liability partners aren’t. This type of partnership is commonly used for short-term business ventures like filmmaking and family estate planning.
- Limited Liability Partnership (LLP)
Limited liability companies (LLC) are typically used by service businesses like accountants, attorneys and medical professionals. While partners’ personal assets in an LLP aren’t usually subject to satisfying business debts, they’re still liable for malpractice.
- Limited Liability Limited Partnership (LLLP)
The LLLP operates similarly to an LLP while personally protecting the partners upon their practice being sued. Because of this, the general partner of an LLLP doesn’t need to use a limited liability entity. The newest of the partnership formats, the LLLP is also the least common. The LLLP isn’t obtainable in all 50 states, so you should ensure that you live in an eligible area before applying.
About Limited Liability Corporations (LLCs)
Specific to the United States, LLC stands for limited liability corporation. This entity is used to separate the business owners of a company from the company itself.
The requirements for an LLC differ by the state in which they’re registered. We’ve outlined the most common way an LLC is filed, although this may slightly differ depending on your location.
- If you form an LLC, you must first choose a name.
- File the articles of organization with your state. These should outline the rights, powers, duties, liabilities and responsibilities of each LLC member.
- Pay the state fee associated with forming an LLC. Next, you’ll pay fees at a federal level to get an employer identification number (EIN).
- Wait for paperwork to be processed and begin your business under the LLC structure.
Comparing LLCs and Partnerships
With various types of partnerships available, it can be a good idea to explore all of your options. The main difference between entering into most partnerships rather than an LLC is personal liability for business debts.
If you don’t feel comfortable committing to financial responsibility for your company, there are ways around it in a partnership. If you decide to start a business partnership, make sure you outline everything in writing. Then, have the partners sign to validate the agreement legally.
Here are some comparisons to help you decide between a partnership and an LLC.
General Partnerships vs. LLCs
Are you operating a casual business and looking to avoid heavy paperwork? A general partnership is probably a better bet than registering as an LLC. If you run a small business with one or two partners, you can enter into a partnership without even formally filing. However, it’s still crucial to outline each partner’s duties to protect yourself legally — even in a general partnership.
Limited Partnerships vs. LLCs
Limited partnership exists between a general partner who has unlimited liability and one or more other partners who have limited liability.
If you have an even partnership, it might be difficult to find one partner who’s willing to be the general partner. This is because they’ll have to accept personal responsibility for company debts. In this case, an LLC might be the better option. This is because all partners will have a personal stake in the company’s future.
If you own a service business like a law firm, dentistry office, or another medical profession, an LLP could be ideal. If your company operates outside of the industries covered by an LLP, you won’t be eligible to apply. Consider the benefits of other types of partnerships like a general partnership or a limited partnership before registering as an LLC.
Limited Liability Limited Partnerships vs. LLCs
Because LLLPs are generally rare, your company might be better suited for an LLC. To select the best partnership agreement for your company, conduct research on how competing businesses in your industry have filed.
Other Pros and Cons to Consider
Choosing between LLC vs. a partnership has greater implications for your company than you might think. You’ll want to consider every positive and negative detail before going forward with one, including the application process.
- How long do you expect it will take you?
- Are your co-owners or partners willing to help with the application process?
- Who is in charge of making sure the right documents get filed in a timely manner?
From paperwork to unexpected registration fees and regulations, it can be both complicated to form a partnership or LLC. Seriously consider your company’s decided taxation agreement, as your decision could result in changes to your personal finances.
The Required Paperwork
The only requirement for dividing up shares of a partnership is that the sum of the shares equals 100 percent. Partnerships are formally registered with the state, and typically require less paper and overall conditions of eligibility than an LLC.
Typically, forming an LLC requires more paperwork and strict regulations than forming a partnership of any kind. When applying to register an LLC, you’ll need to prepare articles of organization and both state and federal paperwork. In addition, you’ll need to prepare an operating agreement, which addresses hypotheticals and details member percentages.
Regulations on Securities
Securities are regulated depending on your specific contractual agreement, which is why you should review yours before signing. Securities can be anything that protects the interest of the individual member or larger company entity. Often, it also address a given member’s options should their company fail.
Fees for Registration
Registering your company as a partnership or an LLC requires significant paperwork. For example, let’s look at North Dakota’s required paperwork for registering a Limited Partnership. Domestic (in-state) fees include the following:
- Search of records
- Annual report
- Domestic name fee
- Articles of conversion
- Use of name consent form
These documents all range from $5 to $110, which can add up.
The fees for registering an LLC typically include a filing fee, Statement of Information and later franchise tax. In California, an LLC filing fee is currently around $70 and a Statement of Information costs about $20 to file. Franchise taxes differ, though California’s currently sits at about $800.
When Tax Time Comes
If you have a personal accountant or tax professional, you should speak with them before starting business ventures. Your commitment as a member of an LLC or partnership will likely influence how you pay taxes. Therefore, this could end up costing you more money than you think. Don’t gloss over this section of your company’s agreement, as it could heavily affect your daily life.
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