Can an LLC Have Partners? Everything You Need to Know
Can an LLC have partners is one of the most common questions asked when business owners are trying to determine whether a LLC is their best choice.4 min read
Can an LLC have partners is one of the most common questions asked when business owners are trying to determine whether a limited liability company is their best choice among business entities. In fact, LLCs evolved out of a desire to provide many of the protections against personal liability offered by corporations, while providing individuals the same flexibility as to how they divide profits and manage the company they have when their business is a partnership.
Two or more business owners just starting out with a business often choose to operate their businesses along the lines of a sole proprietorship. This form of business entity is preferred, because rather than pay sometimes-costly fees to register with a state, the owners can wait to see if the business works out before transferring the business into an LLC. They can structure the business how they want to manage it and distribute profits through a simple agreement. However, they are personally liable for any debts the business incurs, which can be a point of contention in a partnership if it comes down to assigning responsibilities.
Features of an LLC
There are several aspects of an LLC that differentiate it from a partnership:
- The legal term “business partner” does not apply to two or more owners in an LLC. They are instead referred to as “members,” although the roles and responsibility each individual plays in the company can be exactly the same as if it were a partnership.
- LLCs are typically required to file Articles of Organization with the state. The process is rather simple in comparison to establishing a corporation.
- It is highly recommended that LLCs with more than one member put the roles and responsibilities of each member, as well as the process the business will follow upon dissolution, in a formal document called an Operating Agreement. This document is not required by most states, but from a business standpoint it makes sense because it can help members avoid disagreements and conflicts, if problems arise.
- LLCs can be “member-managed,” where the owners handle and share equal responsibility of the daily operation of the business. This form of management mirrors the traditional concept of a general partnership, with individuals working side by side. Unless specified otherwise in the Articles of Organization, the business is automatically a “member-managed” LLC.
- LLCs can also be “manager-managed” where the primarily responsibility of running the company falls to one or more members (or even employees hired for this express purpose), while other members receive compensation for financial investment in the LLC. This resembles the features of a limited partnership.
- LLCs as a business entity are not taxed. Rather, the members are taxed as individuals, just as would be the case in a partnership. This is referred to as “pass through” taxation. This is an advantage that LLCs have over corporations where the company’s income, as well as its distributions received by the owners, are both taxed. This situation is known as “double taxation.”
Differences between LLCs and Partnerships
There are areas where LLCs often differ from partnerships. While most states have established rules to govern general and limited partnerships, regardless of whether formal filing of documents is required, these four characteristics are points where LLCS and partnerships stand apart.
- Formation: While general partnerships can be formed orally, in writing or through conduct as interpreted by a court, and a limited partnership often requires the filing of a certificate of partnership, LLCs are formally required to file Articles of Organization with the state. In the case of partnerships, as with LLCs, the parties should prepare an operating agreement.
- Management: General partnerships are typically operated democratically, with each partner having an equal voice in matters of management and, even in the case of a limited partnership, one or more of the parties is responsible for running the company. LLCs can be managed entirely by managing-members who are essentially employees of the LLC and have no stake in ownership.
- Profit Sharing: General partnerships and LLCs are typically similar in the way profits are distributed between owners. In both cases, owners (general partnership) and members (LLCs) receive an equal distribution of profits. However, in the case of a limited partnership and some instances with an LLC, agreements can be made between parties that create terms for profit payment.
- Legal Liabilities: This is a key consideration between owners when deciding whether to operate as a partnership or an LLC. In partnerships, legal liability falls on the owners’ personal assets. With an LLC, personal assets are protected from legal action.
LLCs tend to be the next logical step as a business entity for two or more partners in a company.
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