LLC Vs. Partnership. Many things come into play when you are choosing an LLC or partnership in forming your business. These considerations include personal liability, ownership, and management, cost of forming and registering the business, as well as taxation. The limited liability company (LLC) is a popular business legal form, which has many similarities to the partnership legal form. However, there are some differences between an LLC and a partnership that you need to consider before you decide on which form your business should take. LLC Vs. Partnership
Forming of Partnership and LLCs / LLC Vs. Partnership
The process of forming a partnership and an LLC is quite similar as both are formed by registering with the state in which the business wants to operate. However, you still have to check with your state’s business division (usually in the Secretary of State department) for more details.
Forming a Partnership / LLC Vs. Partnership
LLC Vs. Partnership. Forming a partnership requires registering with a state. There can be several types of partnerships, depending on the profession of the partners as well as the wishes of the owners for management responsibility and investment. Here, partners in a partnership share directly in the profits and losses of the business, depending on their percentage share. The ownership share of partners can be any percentage, as long as all the percentages add up to 100%. Now the partners determine partnership share at the time the business is formed, and this determination is part of the partnership agreement.
Forming an LLC / LLC Vs. Partnership
An LLC is formed in a specific state. The business files articles of organization (in some states, a certificate of organization) with the state’s secretary of state. Most LLCs function under an operating agreement that defines member percentages and answers other types of questions.
Liability in Partnerships and LLCs / LLC Vs. Partnership
The difference in liability protection happens to the single biggest difference between partnerships and LLCs. Partners or LLC members can be liable for debts of the business and for lawsuits against the business. Here let’s see them one after the other.
Liability in Partnerships
In a general partnership, each partner has personal liability for the debts of the partnership and in addition. Each partner has personal liability for the actions of all of the other partners. Note also that some partnerships may include limited partners who have invested in the business. But who does not participate in the day-to-day management of the business?
Liability in LLCs / LLC Vs. Partnership
Unlike a partnership, an LLC is set up specifically for the sole purpose of providing liability protection to its members, Which accounts for the term ‘limited liability. In case the LLC maintains its separation from the personal affairs of the member, Then the LLC members are only liable for the debts of the business entity to the extent of their personal investment.
Now there are some circumstances when LLC members can have personal liability:
- Firstly, when there is no clear separation between the business and the individuals.
- Secondly, if one or more members happen to personally guarantee a business loan.
- Thirdly, when a member engages in fraud or illegal activities goes beyond the scope of the duties of a member.
- Fourthly, if one or more member has mismanaged the affairs of the LLC.
Taxes in Partnerships and LLCs
Partnerships and LLCs are ‘pass through’ taxing entities, which implies that the taxes are passed through to the owners (partners or members) on their personal tax returns.
Taxes for Partners
The partnership is expected to file a partnership tax return every year on Form 1065, but no tax is due by the partnership. Rather, a Schedule K-1 is given to each partner, showing the amount of the partner’s share of the profits or losses for the year. Then, the partner will have to file this Schedule K-1 with his or her personal tax return.
Taxes for LLC Members
LLC’s are not recognized by the IRS as a taxing entity, thus multiple-member LLCs get taxed in the same way as partnerships. Passing through the income or loss to each member’s personal tax return using the Schedule K-1. Single-member LLCs get taxed as sole proprietors. Filing a Schedule C along with their personal tax returns LLCs can decide to be taxed as a corporation or an S corporation. But partnerships on the other hand do not have this option.
Registration and Record-Keeping
Records for Partnerships
Records for LLCs
Limited Liability Company on the other hand must maintain strict separation from the members’ personal affairs. Sometimes is known as a corporate veil. Understand that if the separation is not strictly kept, the LLC. Members may become personally liable for LLC activities. LLCs are expected to keep records and hold meetings.