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The major difference between an LLC (limited liability company) and a partnership is the protection the members of an LLC have from personal liability for company debts and legal actions against the LLC. In a partnership, one or all the partners may be personally responsible for liabilities and debts of the partnership. An LLC and a partnership are also treated differently for tax purposes. The Internal Revenue Service (IRS) does not recognize LLCs as taxable entities, and they must file federal tax returns as some other type of entity or as individuals. Partnership members are personally responsible for their share of taxable income generated by the partnership.
LLCs are entities of state law, and they may have one owner or an unlimited number of members. LLCs may also have non-member employees responsible for the day-to-day operation of the company. They can exist in perpetuity or until completion of a single project or task. The major advantage of an LLC is that member financial liability is limited to the member’s initial contribution to the company. This includes payment for debts and lawsuit judgments, as long as the company conforms to the state LLC law where it was formed.
A partnership is a professional relationship between two or more people to carry on a business or trade. Each partner contributes money, property, labor, or skills to the partnership. All individuals involved share in the profits or losses of the partnership. A general partnership has no personal liability protection. All partners are jointly responsible for any events arising from the operation of the partnership, including its debts or lawsuits filed against it.
Although treated a little differently for tax purposes, both an LLC and a partnership are allowed “pass-through” taxation. This lets the members meet tax burdens through individual filings. In a partnership, the partners include business profits, losses, and expenses on personal tax returns. An LLC must file as a corporation, partnership, or sole proprietorship for purposes of federal taxes. The choice of entity usually depends upon the number of LLC members.
An LLC and a partnership can create agreements as to the structure, nature, and duration of the business. These agreements set out company rules, such as how profits are divided and the scope of managerial authority. They can also set out how the business is to be funded or dissolved. With LLCs, many states require such agreements, referred to as an “LLC operating agreement.”
The choice between forming an LLC and a partnership can depend on many factors, including the purposes of the parties involved. Information about the two business types can be gathered through online resources. Individual state agencies responsible for registering businesses also have guidelines and information.
Some online services provide information and registration services for a fee. Appropriate tax forms are also available online from the IRS. Anyone with uncertainties about which business entity is the right choice should seek advice from a qualified attorney.