LLC vs Partnership: What’s the difference?

Partnerships and LLCs are two similar business entities with a few crucial differences. You may also want to know the differences between a limited partnership vs limited liability partnership. These differences may seem small at first, but they can have a large impact on how your business operates, how you pay taxes, and where your responsibilities lie when it comes to business debt and liability.

If you’re in the process of starting a new business and are trying to decide whether an LLC or Partnership is best for your new business, understanding the distinctions between the two can help you make the right choice. Here are the ways LLCs and Partnerships are different and alike.

What are LLCs and partnerships?

When it comes to parsing the differences between llc vs partnership, it’s helpful to understand each entity on its own.

• Partnerships – So, what is a partnership business? Partnerships are when two or more individuals form a business. Each partner contributes money or collateral in exchange for a percentage of equity in the business.

• Limited Liability Companies – A Limited Liability Company or LLC can be formed by one or more individuals who become LLC members. Each LLC member carries a percentage of the business’s equity.

The processes for forming both entities are similar. In both cases, the owners must register with the department of their secretary of state. However, Partnerships must also create a partnership agreement that:

• Describes the responsibilities of each limited liability company partner
• Defines how the limited liability partnership operates
• Outlines the process of limited partnership changes

If there are different levels of business owners in the partnership, this will also be described in the partnership agreement. These might include general partners, associate partners, junior partners, and the like.

Conversely, LLC members must file what’s known as articles of organization with their secretary of state’s office. In some states, this is referred to as a certificate of organization.

Liability differences

Perhaps the biggest area of divergence between LLCs and Partnerships has to do with who is responsible for business debt. These differences will depend on a number of factors like general partnership vs llc and limited partnership vs llc.

LLCs and Liability

All LLCs ensure liability protection for their members. This usually means that each member is only liable for debt up to the amount of their contribution to the business.

Partnerships and liability

For partnerships, things are a little less straightforward. The amount of liability protection that’s available to partners, if any, will depend on the type of partnership as outlined in the agreement.

• General partnerships – General partners are responsible for all business liabilities, including partner debt and even the actions of other partners.

• Limited partnerships – As the name suggests, limited partners have limited liability for the business. In most cases, a general partner is confirmed who manages operations and carries full liability.

Tax differences

There are also differences in how partnerships and LLCs pay taxes. So, how are partnerships taxed? Both entities are considered “pass-through” businesses by the IRS, which means that the business itself doesn’t pay income taxes. Instead, the taxes are “passed through” to the partners or LLC members who file them as part of their personal returns.

For partnerships, this means that each business partner is taxed according to their personal gains or losses during a given year. The partnership itself files an information return, and partners receive a Schedule K-1 form that shows their business structure earnings.

The process of filing taxes for an LLC owner will depend on whether the LLC business structure is composed of a single member or multiple.

• Single member LLCs – If an LLC is solely owned, the LLC owner is responsible for its taxes and files a Schedule C along with their personal return.

• Multiple member LLCs – Like partnerships, the profits and losses of an LLC business entity are reflected on the personal returns of its members.

Operational differences

Finally, there are also a few operational differences to be aware of when it comes to llc vs partnership:

• LLCs – Members of an LLC frequently handle the day-to-day operations of the business themselves or allocate those responsibilities to a non-member manager.

• Partnerships – In most cases, partners play a relatively active role in business operations. This is not the case in limited partnerships, however, where the general partner typically assumes operational responsibilities.

To avoid having to set up a partnership in person, simply fill out this EIN number application to apply for a partnership or LLC online right now.

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Sources:

• The Balance. Partnership vs. LLC: What’s the Difference? Should You Form an LLC or a Partnership? https://www.thebalancemoney.com/which-should-i-form-an-llc-or-a-partnership-398646
• The Balance. Types of Partners in a Partnership Business. https://www.thebalancemoney.com/types-of-partners-in-a-business-partnership-398281