Key Takeaways

  • Both partnerships and LLCs share foundational traits such as pass-through taxation, shared management flexibility, and profit/loss distribution based on ownership.
  • The biggest difference is liability protection — LLC members enjoy limited liability while partners in a general partnership do not.
  • LLCs offer more structural flexibility, including options to be taxed as a corporation, while partnerships remain simpler and more informal.
  • Choosing between a partnership and an LLC depends on factors like liability tolerance, investor needs, administrative preferences, and long-term business goals.

Many small business owners who are thinking of registering their entity may wonder whether an LLC is a corporation or a partnership. While a limited liability company (LLC) shares common features with both corporations and partnerships, it is not classified as either. 

What Is a Partnership?

Both partnerships and LLCs are formed at the state level and follow a similar process. A partnership is co-owned by several owners, referred to as partners. While corporations issue stock, partnerships and LLCs allow owners to share directly in the business's profits and losses based on their percentage share. Partners and LLC members can be assigned any percentage share as long as the total of all shares equals 100 percent. The percentage shares are determined when the business is formed and documented in the official partnership agreement.

Both partnerships and LLCs are subject to pass-through taxation, in which profits and losses are reported on the owners' individual tax return. This allows these entities to avoid the double taxation that affects corporations. Like LLCs and unlike corporations, partnerships do not have formal meeting requirements.

While LLCs offer limited liability protection, in a partnership each owner is legally responsible for the actions of the other partner as well as those of the business.

Types of Partnerships and Their Impact on Liability

Partnerships come in several forms, and the level of liability protection varies significantly depending on the structure:

  • General Partnership (GP): All partners share equally in management, profits, and liabilities. Each partner is personally liable for the debts and legal obligations of the business.
  • Limited Partnership (LP): Consists of at least one general partner with unlimited liability and one or more limited partners whose liability is restricted to their investment. Limited partners typically do not participate in daily management.
  • Limited Liability Partnership (LLP): Offers liability protection similar to an LLC but is generally available to licensed professionals such as lawyers or accountants. Partners are shielded from each other’s actions and from many business debts.

Understanding these partnership types helps illustrate how a partnership is like a limited liability corporation — particularly in how ownership, profit distribution, and tax reporting function — but also highlights where liability differences remain.

What Is an LLC?

An LLC is formed by filing documents called articles of organization with the secretary of state office. Owners of an LLC are referred to as members. The LLC members can create an operating agreement that defines ownership percentages and the details of the day-to-day operations of the business.

Many new businesses opt to form as an LLC because it offers beneficial taxation, limited liability protection, and few formal requirements. However, an LLC may have trouble attracting investors because it cannot issue stock certificates. LLCs can elect whether they want to be taxed as a partnership, corporation, or sole proprietorship. However, some types of businesses, such as banks, cannot form an LLC. In addition, in some states, the LLC is dissolved if a member leaves or dies.

Management and Structural Flexibility in LLCs vs. Partnerships

Both LLCs and partnerships offer significant flexibility in how the business is managed and structured. In a partnership, each partner typically has an equal say in decision-making unless otherwise specified in the partnership agreement. Similarly, an LLC can be member-managed (where all members are actively involved) or manager-managed (where members appoint managers to handle operations).

This flexibility makes both entities appealing for small businesses that want to avoid rigid corporate formalities. Additionally:

  • Both entities allow owners to allocate profits and losses in ways that do not strictly match ownership percentages, provided agreements are in place.
  • Neither structure requires shareholder meetings, a board of directors, or annual minutes, unlike corporations.
  • Both offer significant privacy advantages, as ownership information is often less publicly available than in corporations.

Liability: Partnerships vs. LLCs

As mentioned above, liability protection is the primary difference between these two business entities. With a partnership, each partner has full liability for the debts of the business as well as for the other partner's actions. This means that if the business is sued, the partners' personal assets could be seized to pay a legal judgment.

An LLC protects your personal assets in this instance by offering limited liability. This means that you are only responsible for business debts up to the amount of your investment in the business. When you are a member of an LLC, personal liability exists only in specific circumstances:

  • If clear separation between the individual and the business is not maintained
  • If the member in question personally guarantees a loan for the business
  • If the member engages in illegal activity or fraud in the course of running the business
  • If the member has mismanaged the LLC's affairs

Piercing the Veil: When LLC Members May Be Liable

While LLCs are designed to protect members from personal liability, this protection is not absolute. Courts can “pierce the corporate veil” in certain circumstances, exposing members to personal liability if they:

  • Commingle personal and business funds
  • Fail to follow basic LLC formalities (such as maintaining an operating agreement)
  • Engage in fraudulent or illegal activity
  • Personally guarantee business debts

This concept demonstrates how a partnership can resemble a limited liability corporation: just as partners are personally liable for misconduct, LLC members also risk personal exposure when legal boundaries are not respected. However, unlike general partners, LLC members enjoy a built-in liability shield in normal operations.

LLC and Partnership Taxation

As described above, both LLCs and partnerships are subject to pass-through taxation. Both entities file an information tax return annually using IRS Form 1065. The business must also generate a Schedule K-1 for each partner or member to show his or her share of profits and losses. This form is filed with each stakeholder's individual tax return. 

Unlike a partnership, however, an LLC can also opt to be taxed as a C or S corporation. This allows you to choose the most advantageous form of taxation depending on your business. If your LLC members have high taxable income, they will pay a higher individual tax rate than the corporate rate. Choosing to be taxed as a corporation prevents LLC income from being included in your personal taxes. This allows you to keep some profits within the business and therefore not subject to personal income tax.

Despite this benefit, having your LLC taxed as a corporation means its profits will be taxed at the corporate level when they are earned and again at each member's individual level when they are distributed. Your tax attorney or CPA can help you explore various business tax scenarios to determine which election is most beneficial.

Tax Strategy and Growth Considerations

Both LLCs and partnerships provide tax advantages through pass-through taxation, but LLCs have an additional edge: tax election flexibility. LLCs can choose to be taxed as a C corporation or an S corporation — a choice that can significantly impact how profits are distributed and how self-employment taxes are handled.

This flexibility can become important as a business grows. For example:

  • High-earning LLCs may choose corporate taxation to retain earnings and reduce individual tax burdens.
  • Partnerships are more limited — while they can’t change their tax classification, they often benefit from simpler tax filing and fewer compliance requirements.

Additionally, both structures allow members or partners to deduct business expenses, reducing taxable income. This shared tax advantage is one of the key reasons many entrepreneurs compare how a partnership is like a limited liability corporation.

Frequently Asked Questions

  1. How is a partnership like a limited liability corporation?
    Both structures offer pass-through taxation, management flexibility, and shared profit distribution. They also require fewer formalities than corporations.
  2. What is the main difference between a partnership and an LLC?
    The primary difference is liability. LLC members have limited liability for business debts and obligations, while general partners are personally liable.
  3. Can an LLC be taxed like a partnership?
    Yes. By default, multi-member LLCs are taxed as partnerships, but they can also elect to be taxed as C or S corporations.
  4. Is a limited partnership the same as an LLC?
    No. Limited partnerships have at least one general partner with unlimited liability, whereas all members of an LLC typically enjoy liability protection.
  5. Which is better for small businesses: LLC or partnership?
    It depends on your goals. Partnerships are simpler and cheaper to form, while LLCs offer liability protection and more tax flexibility, making them ideal for long-term growth.

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