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LLC vs Partnership (Which is Better in 2019…)

Are you venturing into the corporate world and are wondering what should be the appropriate business structure for your business?

For many entrepreneurs, it is a hard decision whether to go for partnership or LLC (Limited Liability Company).

If you’re one of them, email me at sam@mollaeilaw.com so I can help you decide.

You may have come across the general notion that LLC is more beneficial than a partnership. But did you know that LLC is not a one-size-fits-all option?

Remember this: every business is at a different stage. While LLC may be the best option for one, it may not make a similar business sense for another.

So, the million-dollar question is:

Which One Should You Go for: LLC or Partnership?

 

Though the two options can be similar in terms of management style and also how IRS treats them, they also have their own differences. This may make the decision a bit difficult.

Here are a few points you should consider:

  • How are LLC and partnership similar?
  • What is the difference between the two and what does it mean for me?

We will answer both these questions. As you read on, this article will clarify many of your queries regarding the BIG debate of LLC vs. Partnership.

As always, I am here to help you out and make your business a successful one like the many others I have assisted.

Just drop me an email at sam@mollaeilaw.com and I’ll be happy to assist you.

And now, let’s get down to business…

 

Why Would You Choose an LLC?

You may want to choose an LLC for your startup because it is a business entity much easier to form. An LLC can be formed with merely one partner too. In addition, LLC fees are cheaper as compared to other corporation fees in the initial stages.

You don’t have to bear the hassle of going through the entire business formation stage.

Also, if you intend to run an online business, LLC seems to be a great option. Besides this, LLCs don’t have to pay taxes at the business level. Tax is paid on an individual level. Some other appealing features of this are limited compliance requirements and fewer restrictions.

Let’s walk you through the benefits of LLC for your business – just drop me an email at sam@mollaeilaw.com today.

 

Why Is an LLC Better?

An LLC is better than partnership because there is no accountability. Let’s suppose, you were the owner of a partnership, you would be personally responsible for any business debt.

If the business assets were insufficient, the creditors could even go to your personal bank account, house, or property to settle the debt. Fortunately, this is not the case in LLC.

What is more, you can also raise money easily as an LLC. That’s because you have various options for raising money while operating an LLC. You can induct new members by selling membership interests. The investors will also be at ease knowing that they are not personally responsible for any business debt.

You can also transfer ownership interests without any complications. LLC ownership interests can be sold to third parties without causing any disturbance to the daily operations of the business.

Want to know more advantages of forming an LLC? Read here.

As compared to this, if you have a partnership business, you cannot sell it off as an individual. This is because you need to transfer each asset, permit, and license separately. This may prove to be a hassle. Add to this that the business requires new bank accounts and tax identification numbers.

An LLC can be the best thing to happen to your business. Or it can be worst. But of course, you shouldn’t take any chances. Consult a business lawyer to guide you the best. You can reach me at sam@mollaeilaw.com.

 

Why Would You Choose a Partnership?

You would choose a partnership because this business structure can be an amazing option in many ways. But, first of all, you should be aware of what the term, ‘partnership’ means.

I’ll explain.

Partnerships can be any of the two types: general partnerships and limited partnerships.

  • A general partnership involves two or more parties where they divide the management duties and profit/loss equally.
  • A limited partnership, on the other hand, involves one partner managing the business while one or more partners providing the capital for the business.

The question arises why a partnership is better. In layman language, you could cite one reason that two partners are better than one. Each partner brings their unique talent and skills to the table thereby helping the business prosper in a different way from an LLC.

Here’s the added benefit: With more than a single person having an interest in the business, a higher amount of capital is available for the business. Similarly, in the case of a debt, a partnership has more borrowing capacity.

As compared to other forms of business entities, like corporations, partnerships are easier to form. They are also less strictly regulated than companies.

A partnership can bring the best of both worlds as work can be divided according to skills. The work is not just done on schedule, it is done by the best person for the job. Also, you can divide your business tasks among your partners according to their skills.

 

When Is Partnership a Better Option?

Partnership is a better option when it can cost you lesser than LLC. An LLC requires filing fees, annual state fees, and initial formation fees. This is when setting up a partnership business costs less than forming an LLC.

Also, while it is true that LLC has fewer formalities as compared to a corporation, it still has more paperwork than a partnership. You can open a partnership and even operate it without any formal organizing procedures.

Who wants to bear the added burden of maintaining separate records? As an LLC owner, you’ll have to do this. This means that you’ll have to keep your personal and business records totally separate. Also, you need to ensure that the income generated from operating an LLC should never be mixed with personal money.

In contrast with this, partnerships allow you to move money in and out of the business as you please. You can inject money or withdraw some from the business at any point in time.

 

Is An LLC a Partnership?

No, an LLC is not a Partnership. There are many similarities between an LLC and a limited partnership such as pass-through tax treatment and flexibility in rights and duties of members. But both entities also have many differences.

Read on to find out.

 

What’s the Difference between LLC and Partnership?

The main differences between the LLC and Partnership are in terms of formation, ownership, termination, liability, registration, and record keeping.

Let’s explore each of these categories in detail.

Formation

An LLC is formed by filing an “Articles of Organization” with a corporation’s office or secretary of state. All the following information is stated:

  • Name of your LLC
  • Location of your main office
  • The person who will receive the notices
  • The person who will handle lawsuits
  • Will you as an owner run a business?
  • Identity of owners
  • Rights and responsibilities of members
  • Planned LLC term or duration
  • LLC has a more formal documentation as compared to a general

In the case of general partnerships, two or more people simply agree to be partners. They may conduct business or share profits without carrying out a lot of formalities. The partners do not need to file organizational documents or agreements.

Though it is not mandatory, experts recommend that you should initiate a partnership with a written agreement.

In some states, you are required to present a certificate or an official document to provide proof of your partnership. However, your partners do need to register a trade name.

Ownership

You may initiate an LLC even as a single member.

A partnership, however, can be initiated only if there are at least two members.

In addition, an LLC can have other partnerships, corporations, or another LLC as part of its operations. Foreign individuals and businesses can be owners of the LLC. In a partnership, other businesses cannot act as partners.

Termination

LLC is a separate entity from its owners. This means that the death or removal of any of the members of your organization has no effect on the ongoing operations of your LLC. Besides this, an LLC can stay in business for an unlimited time unless its documents have some specific date for termination.

In a general partnership, business operations have higher dependability on its owners. For instance, if any of your partners quit due to death or for any other reason, the partnership is dissolved. Though you may continue your business operations with other partners, you’ll need to form a new partnership.

Liability

This is one of the biggest differences between an LLC and a partnership.

A single partner can act on behalf of the partnership. Because of the actions of one partner, other partners can be personally responsible for debts and negligence.

The partners have unlimited liability. Therefore, in the case of a lawsuit, partners can lose their car, home, or even personal assets if the business assets are insufficient for the recovery of debts.

In an LLC, members have limited liability against lawsuits. Hence, an LLC member’s personal assets may not be used to cover the company’s debts. An LLC is responsible for paying the business debts in the following circumstances:

  • An LLC personally guarantees a debt
  • The personal funds are mixed with LLC funds
  • LLC has minimal capitalization
  • The LLC violates state law or fails to pay state taxes

Registration and Record Keeping 

The record keeping is not as rigorous as compared to corporations. If your partnership business is not registered with a state, it doesn’t have to abide by any requirements regarding the records of your meetings. It can work in any way desired by your partners.

If your business structure is an LLC, though, it must abide by certain state requirements. It also must make sure that the business affairs are separate from the members’ personal affairs. LLC also must fulfill the requirements of holding meetings and keeping records.

If you’re forming an LLC, make sure to check with your attorney about the requirements laid down by your state.

Unsure how to proceed about it? Legal advice has never been easier. Just drop me a mail at sam@mollaeilaw.com and I will walk you through the different requirements for forming an LLC. I hope this will make the process a breeze for you.

 

How Is an LLC Similar to a Partnership?

An LLC is quite similar to a Partnership in various aspects such as reporting business operations to the state, the division of profit and loss, and managing risks.

Let’s dig deeper.

Reporting to state

Whether you’re forming an LLC or a partnership business, you’re required to report periodically to your state. These reports are submitted typically every year or alternate year.

Profit and loss distribution

Whether it is a general partnership or a multi-member LLC, the division of loss and profit is the same. Unless your partners agree on some other arrangement, general partners and LLC members have an equal share in the profits.

In a limited partnership, you’ll share profits with your partners based upon the value and contribution of the capital provided by each of you.

Regardless of being a general partner, limited partner, or an LLC member, you’ll have the flexibility to divide the profits and losses according to any method you and your partners deem best.

Risk

In a limited partnership as well as in an LLC, you only risk your capital contributions.

 

Is LLC Taxed As Partnership?

Yes. An LLC is taxed as Partnership. This is because IRS doesn’t recognize an LLC as a taxing entity. Hence, a multi-member LLC would be taxed in the same way as a partnership.

But did you know how does a partnership file taxes?

A partnership does so by filing an information return on Form 1065. It shows the total profit and loss from the partnership. Each partner gets the tax form (Schedule K-1) which shows his or her portion of the loss and profit from the partnership. The owner’s personal tax return includes this K-1.

However, as a single-member LLC, you must pay tax as a sole proprietor. You should file Schedule C along with your personal tax returns.

 

How to Convert Partnership to an LLC?

To convert your partnership business to an LLC, you would need to file a document, namely the articles of organization. Following are the steps for converting an existing partnership to an LLC:

Step 1:

Download the document of ‘articles of organization’ form from the state agency’s website. The state agency is responsible for the registration of business organizations.

Step 2:

Fill out the form. For this, you’ll need to provide the following information:

  • Name and address of your LLC
  • Designated registered agent (who will receive service of process in case LLC is ever sued)
  • Indicate if the daily management of your LLC will be handled by people with or without an ownership stake in the LLC
  • Sign and date the articles of organization

Step 3:

File the article of the organization. Some states give permissions to file it online. Its fee varies depending on the state but falls within the range of $50 to $350.

Step 4:

Transfer business assets to the LLC. This can be done by drafting a bill of sale.

Step 5:

Shut down the partnership. If the partnership is registered with a state agency responsible for business registration, you’ll need to file a Certificate of Cancellation.

 

Conclusion

This article provides an in-depth view of the differences between LLC and the partnership, including taxes.

Now that you have read the whole article about LLC vs partnership, which one do you think is better for your business?

If you are looking for a business entity without having to worry about personal liability, then an LLC may be your best bet.

If you want to set up a business with lesser costs and want to include multiple partners for their talents as well as the capital, then a partnership is the answer.

Can’t decide which business structure you should start off with? You would need a one-on-one consultation to guide you into making this important decision.

Email me at sam@mollaeilaw.com and I’ll guide you if forming an LLC is a good move for your business

Sam Mollaei, Esq.

As a Business Lawyer for Entrepreneurs, I help entrepreneurs start their U.S. business without dealing with complicated government forms. I’ve assisted more than 2,246 entrepreneurs successfully start their business and I'm backed by more than 702 5-Star Google Reviews. If you're interested in starting your business, take the first step by requesting your Free Strategy Session on this page.

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