Both limited liability companies (LLC) and partnerships are popular business legal structures with various similarities. An LLC will pay income tax in the same way as a partnership, but there are certain differences between the two that are important to consider before you decide which is the best choice for your new business.
The owners of an LLC are known as members, while the owners of a partnership are partners, of which there are different types. Here are some key differences to be aware of before you decide.
The process for forming both an LLC and a partnership is very similar. Both need to be registered with the state in which the business will operate. Partnerships can be one of the various types depending on the partners’ jobs and how the owners wish to be responsible for investment and management. Partners have a direct share of any profits and losses and the ownership share of a partner can be any percentage as long as the percentage of all partners makes 100%. On the other hand, the majority of LLCs will have an operating agreement that defines the member percentages.
Both LLCs and partnerships are known as ‘pass-through’ taxing entities in which the taxes are passed through to the owners. A partnership will be required to file a tax return each year but rather than tax being paid directly from the partnership, a Schedule K-1 will be provided to each partner which determines their share of the profits or losses for the financial year. This should then be filed with the partner’s personal tax return. Multiple-member LLCs are taxed in the same way, passing the tax responsibilities to the personal tax return of each member. Unlike partnerships, LLCs can decide to be taxed as either a corporate or an S corporation.
Liability protection differences are perhaps the biggest between LLCs and partnerships. Both LLC members and partners can be held liable for both lawsuits against the business and any business debts. In a general partnership, each partner is personally liable for both partnership debts and the actions of other partners, including limited partners who invest in the business but do not participate in the everyday management and running of the company.
On the other hand, an LLC is specifically set up to ensure that each member enjoys liability protection. LLC members will only be held liable for business debts and lawsuits to the extent that they are personally invested or involved. Working with a good business lawyer is essential regardless of whether you decide to set up a partnership or an LLC. Hepworth Legal are business lawyers in Salt Lake City who can help you determine the best legal structure for your small business. These business lawyers in Salt Lake City can also assist if any partner or member is held liable for a lawsuit or business debts.
If you want to start a business with other people, whether to start a partnership or an LLC should be an important first decision to make.