Key Takeaways

  • An LLC (Limited Liability Company) is a hybrid business structure that blends features of both corporations and partnerships.
  • Unlike corporations, LLCs offer pass-through taxation by default, avoiding double taxation.
  • LLC owners, called members, enjoy limited personal liability similar to corporate shareholders.
  • LLCs can be taxed as a sole proprietorship, partnership, S corporation, or C corporation, offering flexibility.
  • Corporations have formal structures (board, bylaws, shareholder meetings), while partnerships and LLCs are typically less formal.
  • Choosing between an LLC, partnership, or corporation depends on factors like ownership goals, taxes, management style, and growth plans.

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. 

Understanding How LLCs Blend Corporate and Partnership Traits

When evaluating is an LLC a corporation or partnership, it helps to understand that an LLC was designed to combine the limited liability protection of a corporation with the tax flexibility and simplicity of a partnership. This hybrid nature gives business owners more control over how their company is managed and taxed.

LLCs shield members from personal liability for company debts and obligations, much like a corporation protects its shareholders. However, unlike corporations, LLCs are not required to follow rigid formalities such as maintaining boards of directors, issuing stock, or holding annual shareholder meetings.

At the same time, an LLC’s internal structure often mirrors that of a partnership. Profits and losses typically pass through to the members, who report them on their personal tax returns. This prevents double taxation and allows small business owners to retain more earnings for growth.

Depending on how the LLC elects to be taxed, it may file as:

  • A disregarded entity (if it has one owner)
  • A partnership (if it has multiple members)
  • An S corporation or C corporation (if the members choose this with IRS Form 2553 or Form 8832)

This flexibility is what makes LLCs one of the most popular modern business structures.

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.

Taxation, Management, and Liability Compared

When deciding between forming a corporation, partnership, or LLC, three main factors come into play — taxation, management, and liability.

1. Taxation:

  • LLC: By default, an LLC offers pass-through taxation. Profits and losses flow directly to members’ personal tax returns, avoiding corporate-level taxes. However, an LLC can elect to be taxed as an S or C corporation to take advantage of certain deductions or self-employment tax savings.
  • Corporation: A C corporation faces double taxation—profits are taxed at the corporate level, and dividends are taxed again when distributed to shareholders. S corporations, however, pass income through to shareholders like LLCs.
  • Partnership: Partnerships are not taxed as separate entities. Instead, each partner reports their share of income or loss on their personal return.

2. Management Structure:

  • LLC: Can be member-managed (run by the owners) or manager-managed (run by appointed managers). This flexibility allows small teams to adapt easily to their business needs.
  • Corporation: Has a formal structure with shareholders, a board of directors, and corporate officers. Decisions must often go through board approval and annual meetings.
  • Partnership: Partners share control equally unless otherwise specified in a partnership agreement.

3. Liability Protection:

  • LLC and Corporation: Both offer limited liability, meaning personal assets are protected if the business is sued or owes debts.
  • Partnership: General partners have unlimited liability, although limited partnerships (LPs) and limited liability partnerships (LLPs) can offer some protection.

Choosing between these structures depends on your business goals. If you want personal liability protection without corporate formalities, an LLC often provides the ideal middle ground.

Advantages of Forming an LLC Over a Partnership or Corporation

Forming an LLC can be advantageous for entrepreneurs who want a balance between flexibility, protection, and simplicity. Here’s why many choose this route:

  • Limited Liability: Members are protected from being personally responsible for business debts and lawsuits.
  • Flexible Taxation: LLCs can choose the most tax-efficient classification.
  • Less Paperwork: Compared to corporations, LLCs have fewer compliance requirements and less administrative overhead.
  • Credibility: Operating as an LLC enhances professionalism and investor confidence.
  • Perpetual Existence: Unlike partnerships, LLCs generally continue to exist even if a member leaves or dies, unless otherwise stated in the operating agreement.

This combination of benefits makes LLCs especially appealing for startups, family-owned businesses, and professional practices.

Choosing the Right Structure for Your Business

When deciding whether an LLC, corporation, or partnership best fits your needs, consider these key questions:

  • Do you want to limit personal liability?
  • How important is ease of formation and management?
  • What are your short- and long-term tax goals?
  • Do you plan to seek outside investors or issue stock?

If your goal is liability protection with operational simplicity, an LLC typically offers the best balance. However, if you need to attract investors or go public, a corporation may be more suitable. A partnership, on the other hand, might fit best for small, jointly owned ventures with minimal formalities.

If you’re unsure which business structure suits your goals, you can find a qualified business attorney on UpCounsel to help evaluate your options and ensure compliance with state and federal requirements.

Frequently Asked Questions

  1. Is an LLC considered a corporation or partnership for tax purposes?
    An LLC can be treated as either, depending on its election. By default, a single-member LLC is taxed as a sole proprietorship and a multi-member LLC as a partnership. Members can also elect to be taxed as an S or C corporation.
  2. Does an LLC offer the same liability protection as a corporation?
    Yes. LLC members enjoy limited liability protection similar to corporate shareholders, meaning personal assets are generally safe from business debts and lawsuits.
  3. Can an LLC be owned by another company or partnership?
    Yes. LLCs can have individuals, corporations, partnerships, or even other LLCs as members, providing flexibility in ownership.
  4. What are the main disadvantages of an LLC?
    LLCs may face higher self-employment taxes and varying state-level fees or franchise taxes. They also have limited ability to raise capital compared to corporations.
  5. How do I decide whether to form an LLC or a corporation?
    If you prioritize simplicity, flexible taxes, and asset protection, an LLC is often best. If you plan to issue stock, attract investors, or eventually go public, a corporation might be more suitable.

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