Are you starting a business with someone else and considering what type of entity you want to form? Two popular business structures for entities with more than one person are multimember LLCs and partnerships.
One common misconception is that an LLC and a partnership are the same. While they can be treated the same for tax purposes, they have their differences.
So, how do you choose a business structure that works best for your situation? What are some of the key differences between an LLC and a partnership? Why pick an LLC vs an LLP?
By explaining the differences between an LLC and a partnership, we’ll answer these questions so you can make an informed decision when selecting the best business structure for your situation.
What is an LLC?
A Limited Liability Company (LLC) is an entity that provides legal protection for its members. Members or owners are protected against personal liability, so a member’s personal assets, like your personal savings or your house, are not at risk if your business has legal issues. The liability protection offered by LLCs is like the protection provided by corporations.
What is a Partnership?
A partnership is simply an agreement or relationship between two or more individuals who operate a business or carry on a trade. Partners contribute money or property to the entity and expect to share in the profits and losses of the business. It’s possible to still have a partnership even if no formal agreement between partners exists.
There are several different types of partnerships. Some examples include general partnerships, limited partnerships, and joint ventures.
Now that we know more about LLCs and partnerships, let’s look at their differences.
Membership
LLCs are formed in states. Each state has its own regulations regarding LLCs, but most do not restrict who can be an LLC member. It’s even possible to form an LLC with only one member. Generally, LLC members are individuals, corporations, other LLCs, or foreign entities.
For most types of partnerships, states do not restrict who can be a partner in a partnership as long as there are at least two partners. However, some states only allow limited liability partnerships (LLPs) for those with certain professions, like accountants and lawyers.
Formation
The process for starting an LLC can be different than the process for starting a partnership. To form an LLC, members need to create articles of incorporation. Since the LLC is a legal entity, members must file the incorporation document with the state where they organize the LLC. There is usually a filing fee, and some states even have additional requirements, like filing notices of formation in newspapers.
The process of forming a general partnership is less formal. You only need two more people to agree to go into business together. No legal document needs to be filed with the state, although partners may choose to create a written agreement. If all you have is a verbal agreement, you can still create a general partnership.
Limited Liability
As we mentioned, LLCs offer limited liability protection for members. The protection generally shields each member’s personal assets if someone sues the business.
The type of partnership you form will determine the extent of liability protection. A general partnership does not offer any liability protection, which means creditors or those seeking legal recourse can go after the partners’ personal assets and savings. There are some types of partnerships, though, that offer some liability protection. For example, in most states, partners of a limited liability partnership (LLPs) are offered some liability protection or only hold partners liable for business debts.
Taxation
A multimember LLC has different tax treatment options on a federal level. By default, LLCs are taxed as partnerships. However, they have the option to elect S corporation status or be taxed as a C corporation. There are different tax implications for an LLC to be taxed as either type of corporation that business owners should carefully consider before making the decision. Most states will follow the same tax treatment as the federal return.
A partnership, on the other hand, cannot choose how it is taxed. Partnerships are pass-through entities. They report information like income and expenses on their partnership tax return, which then flows through to the individual partners. The individual partners then report their share of the income or loss on their tax returns.
Remember that regardless of the business structure, LLC vs. LLP or other kind of partnership, you must file business tax returns. These tax forms are different from the individual ones you are used to. It’s always encouraged to seek the assistance of a tax professional or tax software (hint: X.tax can help!).
Conclusion
Going into business with someone else brings about important considerations like the type of business structure you want to form. Multimember entities have different options available, such as an LLC or a partnership. Both are formed differently, have different regulations, and can be treated differently for tax purposes. Understanding their differences will help determine the best business structure for your situation.
How X.tax Can Help
Once you decide on a business structure, whether it be an LLC vs. LLP, there are tax filings you need to consider. Figuring out business tax filings can be a headache, especially when your primary focus is on business operations. This is where X.tax can step in.
X.tax is a one-stop solution for business tax filers. Our reliable platform can file your LLC or partnership Form 1065 and Schedule K-1 on time with special attention to errors and exceptions. As a bonus, X.tax offers a user-friendly experience, so your tax filings don’t bring about any more headaches.
Tax season is here! Get started with your business tax filings today.
