Difference Between Partnership and LLC: Everything to Know
Understanding the difference between partnership and LLC is an important step in forming your new business.3 min read
Understanding the difference between partnership and LLC is an important step in forming your new business. You'll need to determine which model you would like to adopt as early in your formative phase as possible.
The Difference Between an LLC and a Partnership
A limited liability company, or LLC, is a popular business structure that is similar in some ways to a partnership. The type of structure you choose can have a major impact on how business activities affect your personal financial assets and legal and tax obligations.
Before 1977, partnerships and corporations were the only structures available for businesses to adopt. In 1977, the first LLC law was passed in the state of Wyoming and, by 1996, the business structure was allowed in all 50 states. When deciding which business structure is right for your company, it's important to consider how much liability you are willing to take on for your company in the event of debts or potential legal action.
Registration and Record-Keeping for Partnerships and LLCs
Forming an LLC or a partnership involves similar processes. Both structures require that you register your business in the state in which you intend to operate. A partnership is automatically created when two or more partners decide to operate a business together. This particular structure does not create any form of separation between the owners and the business. An LLC, however, is a separate legal entity. Other differences between the two include:
- A partnership is not required to file documents, such as articles of incorporation, with the Secretary of State to conduct business.
- An LLC, on the other hand, is required to file these documents, which are also known as certificates of formation, in the state where the company intends to do business.
- Partnerships are exempt from paying state fees associated with filing documents like articles of incorporation because such documents are not required for a partnership.
- While a partnership is not required to file articles of incorporation, it is required to register with the state.
There are multiple possible variations of the partnership business structure. Your specific partnership structure will depend on the type of business the partners intend to operate. If, however, a partnership does not register with the state, no specific requirements exist in terms of record-keeping. The partnership is free to operate in a manner the partners deem most appropriate.
LLCs are subject to certain state requirements, however, and are required to keep a certain degree of separation between owner affairs and business affairs. An LLC is required to adhere to certain requirements in terms of record-keeping and holding meetings. Make sure you check with your attorney, if applicable, to see if there are any specific requirements of this nature in your state.
Limited liability companies can be formed with a single member. However, a partnership is required to have no fewer than two members. An LLC can be comprised of individuals or other business entities such as partnerships, corporation, or even other LLCs. LLCs can also have foreign entities and individuals as owners. Because an LLC is not able to issue stock, it might be difficult to secure investors. This is because investors typically want to see some sort of physical proof of ownership in the company.
Partnerships are not able to have another business entity as an owner or a partner. The partners must be individual people. Part of the partnership agreement that is drawn up when a partnership is formed should include how much share each partner has in the business.
One of the most significant differences between an LLC and a partnership involves liability. In a partnership business structure, there is no separation between partners and the company. In simple terms, this means if the partnership faces legal action, the partners are held personally accountable. This level of personal liability could cost partners their personal assets, such as homes, cars, and any other property, if the business does not have adequate assets to cover its debt.
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