LLC vs Partnership California: Everything You Need to Know
The main difference you should understand between an LLC and a partnership is their liability protection. There are two types of partnerships which differ in terms of liability, formation, and in some cases, taxation. 3 min read
The main difference you should understand between an LLC and a partnership is their liability protection. There are two types of partnerships which differ in terms of liability, formation, and in some cases, taxation. Unlike LLC's, partnerships do not offer owners protection from liability. Although both options are "pass-through" structures for filing taxes, an LLC can seek corporate election — partnerships cannot. An LLC follows a corporate business structure combining characteristics of a partnership and requires more paperwork when forming.
Choosing Business Entities in California
When deciding on the best entity for your business there are many factors to consider, including:
- Liability protection
- Taxation laws at the state and federal level
- Management strategies
- Structure of ownership
- Funding consideration
- Possible exit strategies
Each type of entity is unique in terms of the factors listed above. This is why it is important to review your options prior to formation. In California, you may form any of the following entities.
- Sole proprietorships and general partnerships
- Limited partnerships
- Limited liability partnerships (LLPs)
- Limited liability companies (LLCs)
An Overview of California Partnerships
If you're interested in forming a partnership, you will require two or more individuals who are entitled to a certain share of all profits. They will also have some level of authority when managing business-related affairs. This is true unless the business was purposely formed as an LLC, which we will discuss below.
Within a partnership, a written agreement is not required. However, even if the business is small, has only two members, or is run by family members, a simple agreement should be created in order to address the basic fundamentals.
- How will the profits be split?
- How are the responsibilities shared among partners?
- What will happen if one partner decides to leave?
- What if the partnership wishes to take on a new member?
Each business is organized on a case-to-case basis, so make sure you understand how your partnership will operate and what that means for each partner.
An Overview of California LLCs
Under the California Corporations Code, business owners can enjoy the benefits of a partnership while avoiding general liability by forming an LLC. The company itself will be held responsible for all debts and obligations. This means that the owners or "members" do not hold personal responsibility. The main downside to this structure is that members are subject to an annual tax of $800.
On a positive note, LLCs are flexible in that they avoid most of the burdens that corporations face. This includes special regulations in regards to shares, taxation, and distribution. LLCs also benefit in that they do not need to pay taxes at two separate levels, whereas corporations do. This is why in the state of California it often makes the most sense to form an LLC.
General Partnership vs LLC
Choosing the right business structure for your business is one of the most important decisions you will make within the initial stages of operation. When comparing a general partnership and an LLC, the main differences will be based on taxation and personal liability.
When deciding on a partnership, you have two options:
- General partnership — This will involve two or more individuals who agree to run a for-profit business together. In this case, you and your partner(s) would share equal responsibilities in terms of management. You would also split all profits/losses.
- Limited partnership — This will involve at least one general partner who runs and finances the company, as well as another partner who only invests capital to the entity itself.
If you would like to form an LLC, you can do so with one member or multiple members. This business structure includes features of both a partnership and corporation. When deciding which option is best for you and your company, consider four main variables: management, formation, profit-sharing, and legal liability.
If you do decide to form an LLC, know that this will require more paperwork than a partnership. If there are multiple members, you should also create an operating agreement. As an LLC, you must file articles of organization. This documentation will include the name of your LLC (after you have conducted a thorough search), the location of the LLC, the owners' names/addresses, along with any additional statutory requirements.
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