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.
When it comes to parsing the differences between llc vs partnership, it’s helpful to understand each entity on its own.
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:
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.
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.
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.
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.
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.
Finally, there are also a few operational differences to be aware of when it comes to llc vs partnership:
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.