Is a Limited Liability Company a Partership?

by Joe Stone

A limited liability company, or LLC, is not a partnership. LLCs and partnerships are two separate and distinct legal entities that business owners can use to structure their businesses. However, an LLC with more than one owner does have some of the same characteristics as a partnership. LLCs were developed to combine the benefits of both a corporation and partnership.

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Limited Liability Companies

An LLC is formed under state law with the owners of the LLC referred to as members. It differs from a partnership in that an LLC can only be brought into existence by filing the required documents with the state, usually called articles of organization. Also, unlike a partnership, the federal government treats the LLC as a disregarded entity for income tax purposes. This allows the LLC to elect if it wants to be taxed as a partnership or corporation.

Partnerships

A partnership is also formed under state law, but unlike an LLC, there are no state filing requirements. A partnership is formed when two or more persons agree to carry on a business combining their labor and skills -- it can literally be formed on a handshake basis. All partners share fully in the obligations of the partnership, which differs from an LLC where the members are not liable for the LLC's obligations.

Limited Partnerships

A special form a partnership is called a limited partnership and it shares some of the features of an LLC. As with the LLC, a limited partnership can only be formed by filing or registering with the state. Although the limited partnership must have one general partner who is fully responsible for the obligations of the limited partnership, it can have an unlimited number of limited partners whose responsibility for partnership debts and obligations is limited to the amount invested. However, unlike the members of an LLC, limited partners cannot participate in the day-to-day operations of the business.

Limited Liability Partnerships

Another form of business entity that is akin to a hybrid of an LLC and partnership is the limited liability partnership, or LLP. Most states recognize this type of business structure, but not all. In an LLP, all partners receive some form of liability protection and, unlike a limited partnership, can actively participate in the day-to-day operations of the business. Also, the liability protection afforded to partners in an LLP varies from state to state with many state laws providing a more limited shield from liability than others.