LLC vs. Partnerships

By Jeff Franco J.D./M.A./M.B.A.

Partnership and limited liability company structures provide similar protections to the owners' personal assets, and also allow for the same level of management rights. However, there are notable differences in the formalities that relate to the formation, operation and taxation of each business entity. To decide between the two, focus on which one can better serve your individual business needs.

Partnership and limited liability company structures provide similar protections to the owners' personal assets, and also allow for the same level of management rights. However, there are notable differences in the formalities that relate to the formation, operation and taxation of each business entity. To decide between the two, focus on which one can better serve your individual business needs.

Formation

All jurisdictions require LLCs to comply with formation requirements that include filing a certificate or articles of organization with the state agency that has authority to create business entities. This document includes the name of the business, its principal location, and the name and address of an agent who may accept legal service of process on behalf of the LLC. Creating a partnership does not require adherence to any formal governmental requirements. In some instances, a partnership may result by virtue of a business relationship or informal agreement between partners. In many jurisdictions, a simple agreement to share the profits of a business venture is sufficient to create a legal partnership, even if the parties do not intend its creation. To create a formal partnership, business owners must file an articles of co-partnership or its equivalent document with the appropriate state agency.

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Agreements

Both LLCs and partnerships may create an agreement that is enforceable against all partners and members. In the LLC context, members can draft an operating agreement with details about what type of transactions the LLC can enter into, the procedure for admitting new members, and the timing and amount of profit distributions. Similarly, partners can draft a partnership agreement that stipulates any operational procedure. However, unlike an operating agreement, the partnership agreement need not be in writing to be enforceable.

Dissolution

The process of dissolution for both a partnership and an LLC are exactly the same. Dissolution is effective by the mere termination of business activities followed by a liquidation of business assets. Dissolution can be upon unanimous consent of all partners or members, by court order, or pursuant to the terms of an operating or partnership agreement. Although most jurisdictions allow businesses to file a document formalizing the dissolution, dissolution remains binding even without such a document.

Taxation

A partnership must adhere to the federal partnership tax rules. This requires a partnership to file an informational tax return on IRS Form 1065 with a Schedule K-1 attachment for each partner. The K-1 reflects each partner’s portion of business profits and deductions that are taxable on the partner’s personal income tax return. Each partner is solely responsible for her share of tax, and is not liable for other partners’ failure to comply. A partnership has no responsibility to remit any tax payments to the IRS on behalf of the partners. In contrast, LLCs that have more than one member automatically receive partnership tax treatment. However, unlike a partnership, LLC members may elect corporate tax treatment.

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Explanation of the Advantages & Disadvantages of a Proprietorship

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