Partnership or LLC? What You Need to Know

Determining the Type of Business Structure

The most basic aspect of creating a business is to determine which product or service the business will produce and market. Once that has been determined, the next critical step in the process is to determine the type of business structure that will be used to support the product or service being produced. In many ways, this step can be the most crucial element of creating a new business because without creating the proper structure and environment for growth and productivity, even the most unique and promising business idea will have little chance of succeeding.

Going Beyond a Sole Proprietorship

Most small businesses in the United States are created as sole proprietorships because they are easy to establish for an individual and usually most small businesses do not carry severe liability threats. But if your business idea requires more funding or professional support than a do-it-yourself operation would, your best option is to look into a partnership agreement or a limited liability company (LLC).

Partnerships and LLCs can be utilized when two or more individuals join in a business venture for profit. Many times, individuals with a good business idea will enlist the help of other individuals who have better financial connections or a proven business track record in order to create a stronger business association than they could otherwise achieve on their own. They accomplish this by developing a partnership agreement or establishing an LLC.

Differences in the Way a Business Relationship Is Formed

While the two entities provide similar platforms for multiple individuals to do business together, they differ in several different ways, the first of which is how they are formed.

A partnership is a popular business entity because it is very easy to set up and usually requires no formal legal structuring other than local county notification.

An LLC is more difficult to set up because formal legal documents must be filed with the state that include information such as the nature of the business activity to be conducted as well as the names and addresses of the members involved with the setup of the LLC. An LLC must also pay a filing fee with the state they are doing business in as opposed to a partnership that is not required to do so.

Personal Liability Differences

Partnerships and LLCs are also quite different when it comes to the personal liability of their members. Members of a partnership are personally liable for the debts and actions of the partnership or other individual partners. This means that their own personal assets can be held liable in the event of legal action against the partnership or one of its members. On the other side, members of an LLC are not held personally liable for actions against the LLC and their personal assets may not be attacked to satisfy a business debt. The only real liability to the LLCs members is that they are accountable for the company's debts up to the amount of their own personal investment in the company.

How Taxes Are Paid

Partnerships and LLCs can be both similar and different in the way they manage their businesses and in the method they choose to pay taxes. In a partnership, each member is involved in the management of the operation in various capacities, and the overall strength of the business depends on the management abilities of the individual partners as a group. In an LLC, the members have the discretion to operate the business themselves, or they can appoint non-members to manage the company's affairs leaving the owners free from daily management responsibilities.

In this way, an LLC operates in a manner similar to a corporation, and the LLC can also similarly adjust how they conduct themselves when it comes to taxation. The partnership is a straight forward taxation model where the partners pass through their share of profits and losses to their personal income taxes. The LLC, on the other hand, has the ability to determine if they want to be taxed as a sole proprietorship, a partnership or even as a corporation. This gives the members of an LLC much more flexibility when it comes to determining the structure of taxation that will best benefit the organization as a whole.

Dissolution of Partnerships and LLCs

The final way partnerships and LLCs differ is the manner in which they are dissolved. A partnership is a very easy entity to dissolve should the need arise. It can be done by:

• mutual consent,
• resignation or death of a partner,
• a buy out, or
• upon the completion of a specific project for which the partnership was created in the first place.

The partnership does not have to file dissolution documents with the state as opposed to an LLC which must complete these documents and file them with the Secretary of State where the LLC was formed. The LLC must also pay a fee when filing the dissolution documents.

Benefits and Drawbacks of Partnerships and LLCs

Both partnerships and LLCs can have benefits and drawbacks depending on the type of business you are setting up. If time is of the essence and the business hinges on the ability to get up and running quickly, or if the product or service offered is evolving and requires additional input or financial backing than you can provide by yourself, a partnership is a more flexible and simple entity to get started and operate. An LLC might be more beneficial if there is real concern for the liability of your personal assets or if a more involved management structure is required to operate your service or develop and produce your product.

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