Creating a Partnership LLC: Everything You Need to Know
Creating a partnership LLC comes with many benefits, including liability protections for business-related debt and pass-through taxation.3 min read
2. The Difference Between LLCs and Standard Partnerships
3. Forming a Multi-member LLC
4. Partnership LLC Taxation
Updated July 14, 2020:
Creating a partnership LLC comes with many benefits, including liability protections for business-related debt and pass-through taxation. A limited liability company (LLC) with more than one owner is a relatively simple, flexible, and affordable management structure that's easy to establish.
How to Set up a Partnership LLC
A partnership is a company that has two or more owners sharing responsibility and control of a company. An LLC can be owned by one person or multiple members. Unlike a traditional partnership, LLC owners are called “members” and are not personally liable for a company's debts and obligations. Since the actions and debts of one partner in a standard partnership must be accounted for by other partners, many business owners choose to create an LLC to protect themselves.
Starting an LLC with a partner is a fairly straightforward process:
- Create an operating agreement specifying each member's role in the company. Include information on how partners will make decisions, what each person's financial contributions are, and procedures for adding or removing partners.
- Choose a name for your partnership LLC and either register it or file a DBA form with your secretary of state.
- Publish a notice in local newspapers announcing your intent to form an LLC if your state requires it.
- Create and file an Articles of Organization with your secretary of state's office:
- Check the secretary of state's website for any state-specific forms you may need to file.
- Most Articles of Organization should include the LLC's business name, its physical address, the name of its registered agent, and the contact information of each member.
The Difference Between LLCs and Standard Partnerships
Although LLCs can be structured to operate as partnerships, there are some differences between a partnership LLC and a standard partnership.
LLCs offer the same flexibility as partnerships in how owners manage the business or distribute profits. Unlike a regular partnership, however, an LLC owner is not personally liable for the debts accumulated by another partner except in the rarest circumstances. This key difference has encouraged many partners to go the LLC route.
Depending on your state, you may have to report to the state periodically concerning your business. In most cases, there are no recordkeeping requirements, although you might have to schedule an annual meeting between owners and management. The more records you keep, however, the better liability protections you'll enjoy since you can prove a strict separation between all business and personal accounts. Check with your attorney for any state-specific requirements you must meet.
Forming a Multi-member LLC
Establishing a multi-member LLC follows the same process as forming a single-member LLC. You should specify how the business will be managed and how you plan to distribute profits in your operating agreement. The operating agreement isn't a legally required document, but it helps prevent conflict between members in the future.
Like any partnership, a multi-member LLC is registered with the state and profits and losses are shared according to each member's percentage share. You can divvy up ownership shares however you see fit as long as the percentage adds up to 100 percent.
One of the biggest priorities when forming a partnership LLC is deciding its management structure. Any LLC can be “member-managed,” meaning that the company is managed by the owners, or “manager-managed,” which is where the owners hire outside management to take care of daily operations. You can opt for all members to serve as managers and divide management responsibilities if that works best for your business.
Unless otherwise stated in your operating agreement, an LLC will default to a member-managed entity in most states.
Partnership LLC Taxation
The Internal Revenue Service doesn't recognize LLCs, single-member or otherwise, as business entities in their own right. Instead, each member must file individual tax returns as either a partnership or corporation.
When the LLC acts as a partnership, taxes pass through the company and onto the owners, so you aren't left with the double taxation issue corporations deal with. Simply file Form 1065 each year on the partnership's behalf and have each partner list his or her share of the profits and losses on a Schedule K-1. File these Schedule K-1s with each owner's personal tax return.
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