Is a LLC a Partnership or Corporation: Everything You Need to Know
Is a LLC a partnership or corporation? No. While these entities have certain similarities, they are distinct business structures and have their own individual benefits and disadvantages. 3 min read
Differences in Business Structures
Selecting the best structure for your business is of the utmost importance if you want your business to succeed. It can also determine what protections you are entitled to and your tax liabilities. While all business entities have their pros and cons, there is no entity that will perfectly suit every company.
Picking the perfect entity for your business depends on factors such as your industry and the number of people who will possess an ownership stake in your company. Before you select a business structure, you should research each type of entity and consider their advantages and disadvantages.
Before 1977, it was only possible to form a business as a partnership or a corporation. The original LLC law was passed in Wyoming in 1977. Today, every state recognizes LLCs. However, the IRS has no tax classifications for limited liability companies. Instead, the IRS will treat an LLC as either a partnership or a corporation.
Partnerships: Two or More People
When multiple people share ownership duties in a company, this is known as a partnership. Unlike other business structures, partnerships do not need to submit documents to the state before beginning operations. However, partnerships will must eventually register with the state, and there are multiple partnership types available, including limited partnerships and general partnerships.
Partnerships do not give owners company stock, which makes this entity type different from corporations. Instead of stocks, partners are directly provided with losses and profits, with the exact amount they receive determined by their percentage of ownership. As long you distribute 100%, you can allocate partner ownership percentage in whatever way you want. There is no legal separation between a business' owners and the business itself in a partnership.
Unlike an LLC's members and a corporation's shareholders, a company's partners are personally liable for:
- Business expenses
- Lawsuits against the business
If you are a partner in a business and your business loses a lawsuit, you could lose your personal assets as part of the judgment, including homes and cars. You may also be responsible for the negligent actions of your partners.
However, partnerships are very simple to establish and provide beneficial taxes. While partnerships will need to file tax Form 1065 every year, the partnership itself is not responsible for paying taxes. Every partner of a business will be given a Schedule K-1 form, which will detail their share of losses and profits. Then, the partners will file this form with their individual tax return and pay the required taxes.
In exchange for a portion of ownership, partners can invest in a business with their money, skills, or labor. If you choose a partnership, you and your partners will be responsible for managing the daily operations of your business. To prevent double taxation, one person in the business should handle litigation and debts.
Both LLCs and partnership are types of pass-through entity, which means company taxes are passed to owners and reported on their personal returns.
A big difference between partnerships and corporations is that partnerships have no formal meeting requirements.
If a partner decides, or a partner wishes to sell their ownership percentage, the partnership will end. However, if the partnership has a buy-sell agreement, one of the remaining partners can purchase the ownership share of the exiting partner so that the partnership can continue.
When partners disagree on business-related issues, it can easily result in a lawsuit. To avoid partnership disputes, it is a good idea to develop a partnership agreement that covers issues such as how to allocate profits.
Limited Liability Company: New Kid on the Block
Limited liability companies are a new type of business entity whose popularity has skyrocketed among new business owners.
Forming an LLC requires filing either a Certificate of Organization or Articles of Organization with your state and meeting strict naming requirements. LLCs, unlike partnerships, need only one member, although having multiple members is allowed.
An LLC can be owned by:
- Another LLC
The reason businesses form an LLC is to receive the beneficial liability protections of a corporation and the advantageous tax treatment of a partnership.
If you need help choosing between corporations, LLCs, and partnerships, you can post your legal needs on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Stripe, and Twilio.