What Is the Difference Between an LLC and a Partnership?: Everything to Know
A partnership is a simple business entity with two or more owners, while an LLC is a more formal business structure that can have any number of owners.3 min read
“What is the difference between an LLC and a partnership?” is a question that many aspiring business owners ask when they are choosing a legal structure for their new businesses. A partnership is a simple business entity with two or more owners, while a limited liability company (LLC) is a more formal business structure that can have any number of owners. If you are thinking of starting a partnership or LLC, you should carefully compare their advantages and disadvantages to determine which structure better suits your business needs.
What Is a Partnership?
A partnership is a relatively informal business structure. In this kind of business entity, there are two or more individuals sharing ownership responsibilities. A partnership is not legally separate from its owners. It is not required to issue stock certificates, hold meetings, keep minutes, and elect officers. Partners in a partnership generally have an equal share in:
- profits or losses
- management of the business
- responsibility for business debts and liabilities
The rights and responsibilities of the partners are usually stated in a partnership agreement. Each partner can have any percentage of ownership, as long as the percentages owned by all partners add up to 100 percent.
What Is an LLC?
An LLC has more similarities with a corporation than with a partnership. It can be established with just one owner. Instead of operating as a sole proprietor, you can create a single-member LLC to protect yourself against personal liability. In order to start an LLC, you are required to file Articles of Organization with the office of the Secretary of State or the appropriate state agency and meet other state filing requirements.
Unlike a corporation, an LLC's owners are known as members instead of shareholders. Also, it is managed by managers rather than directors and officers. An LLC allows you to operate your business with the flexibility of a partnership while enjoying the personal liability protection of a corporation. Since it is a separate entity from its owners, its owners are not personally liable for its debts. An LLC pays its income taxes in the same way as a partnership.
Similarities and Differences Between an LLC and a Partnership
One of the main differences between an LLC and a partnership lie in their owners' personal liability. The partners of a partnership have unlimited personal liability for business debts, lawsuits, and liabilities. This means that they can lose their homes, cars, or other personals assets if the partnership faces a lawsuit. In addition, one partnership can be personally liable for another partner's negligence.
An LLC, on the other hand, protects its owners from being personally liable for its lawsuits and liabilities. As such, the personal assets of its members cannot be used to cover business debts in the event of a collection action or lawsuit.
In a partnership, partners typically share the responsibility of managing the company's day-to-day operations. An LLC can have its members manage its daily affairs or appoint non-members to do so. With this flexibility, it can operate more similarly to a corporation.
A partnership reports its taxes on IRS Form 1065 and does not pay taxes at the company level. Instead, it gives out a Schedule K-1 to each partner, who will then file the form with his or her individual tax return.
The IRS does not recognize an LLC as a tax entity. It taxes a multi-member LLC like a partnership, allowing its income or loss to flow through to the personal tax returns of its members. A single-member LLC pays taxes like a sole proprietor, requiring its member to file Schedule C with his or her personal tax return. Also, an LLC can choose to pay taxes as a corporation.
Registration and Recordkeeping Requirements
If a partnership chooses not to register with the state, it is not required to keep records of meeting minutes. Partners have the freedom to decide how their partnership should operate. An LLC is required to comply with more state requirements. It must keep itself separate from the personal affairs of its owners and meet certain recordkeeping and meeting requirements.
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