Can I Have a Partner with an LLC?

By Jane Haskins, Esq.

Can I Have a Partner with an LLC?

By Jane Haskins, Esq.

If you're forming a business with someone else, you probably think of yourselves as business partners. But that doesn't mean you have to structure your business as a partnership. You can also form a two-member LLC.

An LLC can be like a "partnership" between two people, but from a legal standpoint, an LLC is different than a partnership. An LLC provides liability protection and potential tax savings that a general partnership doesn't. But a partnership can be simpler to set up and maintain.

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Formation of Partnerships and LLCs

Whenever two people go into business together, they automatically have a general partnership. You don't need a written agreement forming a partnership and you don't have to file paperwork with the state. However, a written partnership agreement that describes the way you'll share responsibilities, profits, losses, and decision-making can help you avoid expensive conflicts later on.

Forming an LLC means filing forms with your state to formally establish your company. You'll pay a filing fee. You should also have an LLC operating agreement that serves a similar purpose as a partnership agreement.

If your business is a general partnership, then you and your co-owner are legally considered "partners." But if you set up an LLC, you'll become "members" of the LLC. Because LLC owners are called "members," there's technically no such thing as an "LLC partner." But in day-to-day life, LLC members often refer to their co-owners as "business partners." This can be confusing for new business owners trying to sort out the difference between an LLC and a partnership.

Liability in Partnership and LLC

Because a general partnership is an informal business structure, there's no legal and financial separation between you and the business. As a general partner, you can be held fully liable for all business debts and for wrongful conduct committed by any of your partners or employees during the course of business. This open-ended liability is the major drawback of general partnerships.

An LLC, however, has its own legal and financial identity. LLC creditors can go after the LLC's money and other assets, but they can't pursue your personal bank accounts, homes, cars, and other possessions unless you've signed a personal guarantee on a loan. You remain personally liable for your own wrongful conduct, but not for the conduct of your employees or co-owners.

Taxes in Partnership and LLC

As a partner in a general partnership, you're considered self-employed. You'll file an informational partnership tax return and you and your partner will each report your share of the partnership's income and expenses on Schedule C of your personal tax returns. You'll be responsible for paying income and self-employment taxes.

LLCs are taxed in the same way as partnerships—unless you choose to be taxed as a corporation. If your LLC is taxed as a corporation, you and your partner can be employees of the LLC. This may save you money on self-employment taxes and allow you to contribute more to your retirement accounts.

You can also elect to be taxed as a C corporation. The company will pay corporate income tax and you and your co-owner will be taxed on money you receive.

Other factors to keep in mind:

  • Some LLCs can elect to be taxed as an S corporation, with business income passing through to your personal tax return.
  • Taxation can be complicated and there are many factors to consider. It's always smart to meet periodically with an accountant to discuss your business's tax status.

LLC vs. Partnership: Other Key Issues

In deciding whether you should opt for an LLC or a partnership, there are a few other issues to consider. These include:

  • Registration and record keeping. In some states, LLCs must file an annual report and pay a fee. Partnerships don't have these obligations, but you'll need to register a DBA unless you use the partners' names as your business name.
  • State regulations. In some states, you can also form a limited liability partnership. This is basically a general partnership with limited liability for some or all of the partners. Some states limit LLPs to certain professions or require professionals to form an LLP instead of an LLC.

Understanding how LLCs and partnerships work will help you decide which business form is best for your company. If you're considering a general partnership, go over the pros and cons with a lawyer to make sure you're making the best choice for your new business.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.

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