Is an LLC a partnership or corporation? The answer to this question is complicated. A limited liability company (LLC) is a type of business structure that combines the best elements of partnerships and corporations without their drawbacks. 

The Difference Between Corporations, LLCs, and Partnerships

The business structure that you choose for your company can have big assets on the taxes you will need to pay and your private assets. Corporations, LLCs, and partnerships are three of the most common business structures. No single business structure fits the needs of every business.

When you're trying to choose the right business entity for you, keep in mind these factors:

  • Where your business is located
  • Your industry
  • How many owners your company will have
  • Your strategy for leaving your business

Comparing the strengths and weaknesses of each entity type is your responsibility as a business owner. In the past, it was only possible to form a corporation or partnership, as the LLC structure had not yet been created. However, LLCs have quickly surpassed corporations and partnerships as the most popular business structure for entrepreneurs.

In 1977, Wyoming became the first state to offer the LLC structure. In 1996, it became possible to form an LLC in every state in the country. 

Features of LLCs, Corporations and Partnerships

The main purpose of a corporation is to protect a company's owners and stockholders from company liabilities. In exchange for these protections, corporations are subject to double taxation, meaning both corporate profits and shareholder dividends are taxed.

In essence, partnerships are a corporation's complete opposite. Partnerships will have multiple owners who are referred to as partners. Partners will generally share the responsibilities of owning a company. It is also common for partners to handle the day-to-day management of the business. The exact responsibilities of every partner will be described in a document known as a partnership agreement. Other businesses are not allowed to be partners in a partnership.

When establishing a partnership, you will need to register it with your state. In addition, you will need to choose which type of partnership best fits your business's needs. Partnerships differ from corporations in that instead of providing stocks, partnerships allocate profits and losses directly to owners based on their share percentage. You can distribute partnership ownership percentages however you decide. Generally, partners will negotiate ownership shares when the partnership is formed, and these percentages will be documented in the partnership agreement.

A partnership will usually end if an individual partner passes away or decides to sell their ownership stake in the business. Most partnerships include a buy-sell agreement so that one partner can buy the ownership shares of another partner without dissolving the company. Despite this fact, partnerships are considered to have limited lifespans. Partnerships eventually end, usually at the conclusion of a deal or project.

An LLC is a business structure that can be formed with only one member. However, LLCs can also have multiple members, some of which can be businesses. Partnerships, other LLCs, and corporations can also be members of a limited liability company

Forming an LLC is very similar to establishing a partnership. For instance, LLCs must be registered in the state where the company intends to operate. When forming an LLC, Articles of Organization or a Certificate of Organization will need to be filed with the Secretary of State.

Owners of a limited liability company are called members. In an LLC, members can either handle company operations themselves or hire an outside manager to take care of the day-to-day needs of the business. These flexible management options mean that LLCs operate more similarly to a corporation than a partnership. The majority of LLCs have an operating agreement that covers information such as ownership percentages and rules for running the business.

The owners of the LLC will need to decide how the company will be taxed, as the IRS can treat limited liability companies as corporations, sole proprietorships, or partnerships.

The purpose of forming a limited liability company is the same as a partnership. Protecting company owner's personal assets from business liabilities. Most people consider an LLC as the perfect business structure, and most new businesses choose this entity option. Unless you list a date when your company will be dissolved in your Articles of Organization, an LLC can last indefinitely.

If you need help understanding the differences between LLCs, corporations, 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, Menlo Ventures, and Airbnb.