LLC Partnerships: Everything You Need to Know
LLC Partnerships refer to LLC and partnership entity types. 3 min read
LLC Partnerships refer to LLC and partnership entity types. LLCs are regulated at the state level and they differ from general partnerships in that LLCs give limited liability protection to their owners. Partnerships have an advantage over LLCs in that partnerships don't incur state registration and annual maintenance fees.
LLC or Partnership: Which Entity Type Is Right for You?
Limited liability companies are formed by filing the Articles of Organization with the secretary of state. The concept of LLCs started in Wyoming in 1977. Like partnerships, they are pass-through entities and the owners of LLCs have limited liability protection just like the shareholders of corporations. However, LLCs are not subject to the formal structural and management requirements of corporations.
Partnerships, on the other hand, are semi-informal businesses that may not need to be registered by the state. They generally do not offer limited liability protection to the owners unless the owners file a Limited Liability Partnership (LLP). In this case, at least one managing partner does not have limited liability protection while the other silent partners have limited liability protection.
Similarities Between LLCs and Partnerships
Partnerships and limited liability companies have a number of similarities:
- Absence of Corporate Formalities
Unlike corporations, both partnerships and LLCs are not required to have formalities like annual shareholder meetings and board of directors meetings. Both entity types are not required to keep meeting minutes and formal resolutions of major business decisions.
- No Limitations on Membership
There is no limit on the number of owners in both partnerships and limited liability companies. In addition, owners can be citizens of any country. This is not the case with S corporations whose ownership is capped at 100 shareholders and whose owners must be either U.S. citizens or U.S. residents.
- State-Level Businesses
Both LLCs and partnerships are normally state-level businesses that are regulated by the home state.
- Pass-Through Status
Both entity types have pass-through status for federal tax purposes. They are not required to pay federal taxes on the profits of the business. This is different from C corporations which are required to pay corporate tax to the IRS and are in effect "double taxed".
- Ownership Transfer Limitations
Transferring interest in these business types may require the consent of the other members unless the operating agreement of the business states otherwise. This typically limits the ability of the business to attract investors. This limitation generally does not apply to corporations.
Differences Between LLCs and Partnerships
There are a number of differences between limited liability companies and partnerships:
- Liability Protection
While limited liability companies cover all their members with limited liability protection, owners of partnerships do not have limited liability protection unless the partnership is a Limited Liability Partnerships (LLP). Even in an LLP, only non-managing partners have limited liability protection.
- Registration Requirements
Partnerships typically have less stringent registration requirements compared to LLCs. Many states do not even require general partnerships to file formation documents with the state. LLCs, on the other hand, need to appoint a registered agent for service process and file the Articles of Organization with the secretary of state.
- Perpetual Existence
LLCs can have perpetual existence. They have an independent life separate from the lives of the owners. If one of the LLC members dies, the business can continue functioning without issues. The issue of perpetual existence is complicated with most partnerships, and many partnerships can be dissolved after the death of one or more owners.
- Estate Planning
The owners of a partnership can easily gift their interest in a business to their children during their lifetime without paying taxes. Gifting interest in an LLC is harder and the amounts that can be gifted without incurring taxes tend to be lower.
The choice between an LLC and a partnership will depend on the business goals of the owners. Small businesses whose owners are acquaintances and who do not want to be subjected to complex filing requirements and annual fees might be fine with partnership status. A bigger business with a higher income might be better off filing as an LLC. The limited liability protection of an LLC can help business owners who have a stake in multiple businesses.
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