Deciding on the right business structure is paramount for any entrepreneur. It sets the foundation for your company’s legal and financial operations and can significantly impact its success in the long run. Currently, two of the most popular options for structuring a business are Limited Liability Companies (LLCs) and Partnerships.
While both offer unique advantages and disadvantages, it’s essential to understand their differences to make an informed decision.
In this guide, we’ll dive into their benefits and limitations to help you determine which is best suited for your specific needs and goals. At the same time, we’ll explore how they differ from each other for a more comprehensive understanding of their nature.
What is an LLC?
LLC is a business structure that can be formed by only one person. One well-known fact about LLCs is that it limits its member’s liability. For instance, if the LLC is undergoing a lawsuit or has debts to settle, the members won’t have to get money from their personal funds to pay any settlements.
Furthermore, LLCs are considered pass-through entities. Members can claim any profits or losses the company generates on their tax returns. For this reason, LLCs have become a famous structure for aspiring entrepreneurs over the last few years.
What is a Partnership?
Partnerships are arrangements where the parties agree to go into business together. While one entrepreneur can form LLCs, partnerships require more than one co-owner. The agreement will define each partner’s share of the entity, which varies but must always equal 100% of the total.
An example is that one owner has a 70% share, while the other only has a 30% share.
Partnerships are also considered pass-through entities. However, the IRS also regards this business structure as a taxing entity. Therefore, the partnership will file a yearly tax return without owing any taxes. Each member will use the return documents to report profits and losses individually.
Similarities of an LLC and a Partnership
If we’re talking about liability, an LLC is much better than a partnership since it reduces the members’ liability if a problem arises. However, both have similarities that will help you decide which is suitable for you:
- Both are registered in the state where the business will primarily operate.
- Both won’t have to pay taxes, also known as pass-through taxation. However, the responsibility falls on each member to file a tax return.
- Losses and profits are distributed directly to its owners or members.
Differences Between an LLC and a Partnership
Apart from the number of members that can form each entity, more elements can separate an LLC from a partnership business structure. These fundamental differences include the following:
- In partnerships, the debts of the business are the responsibility of each partner.
- Regarding management, partnerships have an equal say in decision-making, while LLCs have more flexibility in delegating responsibilities.
- LLCs can choose to be taxed as a corporation or an S corporation.
Once you have figured out which structure suits your business best, it’s necessary to consult with a legal and tax professional for guidance on the proper registration process and any other vital steps. Selecting an appropriate structure from the start can save you time, money, and potential headaches in the future. These factors should be discussed before you can even start planning your future grand opening and using Corporate Presentation Checks for press calls.
Benefits of an LLC
Over the last decade, the formation of LLCs has increased due to the irrefutable advantages this business structure offers. Below is a quick overview of these benefits:
- No-member limit: LLCs don’t have any restrictions or limitations on the number of individuals who can form the entity. Furthermore, other LLCs, foreign entities, and individuals can join an LLC as members. A single individual can also create an LLC.
- Limited liability: As mentioned, members are not personally liable for any business debts or legal obligations.
- Flexibility in management and taxes: LLCs have more options for managing and taxing their business.
- Inexpensive filing costs and little paperwork: LLCs have more paperwork than partnerships. However, it’s still relatively less than corporations, making it an attractive option for small business owners. Apart from that, the filing costs are lower and more affordable.
Drawbacks of an LLC
While there are undeniable advantages to forming an LLC, it’s important to look at its downsides because some of these might be a deal breaker for you. The main disadvantages of an LLC include:
- LLC members can’t pay themselves minimum wages.
- Some states charge expensive renewal fees and capital or franchise taxes.
- Ownership is spread evenly among members, regardless of their contribution or investment to the company.
Benefits of a Partnership
You may opt for a partnership if you and your friends want to commit to a business agreement. Here, partnerships are not required to complete a formal incorporation process through the government. Here are some advantages that members like about this business structure:
- No strict corporation structure and rules: Unlike LLCs and other corporations, partnerships don’t follow the same rules as they do. Therefore, they have less paperwork and guidelines to be mindful of, allowing more time to focus on running the business.
- Can take on Limited Partnership: Limited partnerships subject its members to less liability. In a limited partnership structure, there are one or more general partners and one or more limited partners. It spreads liability equally across all members.
- Pass-through taxation: Partnerships also don’t pay taxes, but their members do. Its profits and losses will be transferred directly to its owners, who must individually claim them on their personal tax returns.
Limitations of a Partnership
Although partnerships may seem like a good option for new business owners, they also have their fair share of drawbacks that can affect your perception of them. So, you might want to review and reflect on these cons before bringing out your big checks for future business events and presentations. Some of these include:
- Members are equally liable for the debts the business makes.
- Creditors can go for each member’s assets unless the business has limited partners.
- Members become responsible for another partner’s debts and other unfavorable actions.
Build a Successful Business with the Right Structure
Hopefully, our guide has shed some light on the similarities and differences between LLCs and partnerships. Considering several factors, such as liability, taxes, management, and paperwork, is crucial before you make that choice. Each structure has its benefits and drawbacks, but understanding them can help you choose the right path for your business venture.
Aisha Noreen is an owner of a small business with more than 9 years of experience in the marketing industry. With the wisdom of an old soul, she always seeks innovation and mind-blowing ROI techniques. Her unique approach helped many small businesses thrive and she can surprise you in many ways as well. Believe it or not, her energy, passion, and creativity are contagious enough to transform your business and take it to another level.
