General Partnership Vs. LLC

By Elizabeth Rayne

Choosing a proper business structure is one of the crucial steps encountered by owners in the initial stages of operating a company. One option is to structure the business as a limited liability company; another route is formation as a general partnership. Differences in tax liability, as well as personal liability for members regarding debts and other legal obligations, are the defining characteristics of what separate these designations.

Formation and Ownership

LLCs and general partnerships differ in the method of formation and number of owners. Generally, an LLC is created by filing formation documents with the state business registrar, while a partnership is formed as soon as two or more individuals begin doing business together. An LLC may be owned by a single individual or multiple people. Owners of an LLC are known as members. In contrast, partnerships are owned by at least two individuals. As such, a sole business owner may not own a partnership.

Liability

An LLC is an independent legal entity, while a general partnership is a business that operates under the names of its owners. As an independent legal entity, an LLC may own property or enter into contracts separately from the owners of the business. LLC members are not usually personally liable for the debts or obligations of the business. On the other hand, partners in a general partnership are personally liable for the business's debts and obligations. When a partnership owns assets or owes money, the partners do as well.

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Taxation

In some cases, an LLC and a partnership are treated similarly by the IRS. The IRS does not recognize an LLC as a business entity, but instead requires LLCs to elect to be taxed as a corporation, partnership or sole proprietorship on tax returns. When the LLC has more than one member, it may elect to be treated as a partnership for tax purposes. Partnerships are considered disregarded entities, meaning they do not pay separate business income tax. Instead, partners report business income on their personal tax returns in proportion to their ownership of the business.

Management

General partnerships and LLCs may be managed in a similar way. Each business type allows for a flexible management structure and permits business owners to decide how they want to separate responsibilities. In an LLC, members may draft an operating agreement to designate management duties and specify how profits will be distributed. Similarly, a general partnership may have a partnership agreement to specify the rights and responsibilities of each member.

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Can I Have a Partner With an LLC?

References

Related articles

Characteristics of a Limited Liability Company

The limited liability company, or LLC, is a popular business entity type among entrepreneurs and small business owners because of its liability protection and flexibility both in terms of tax treatment and operation. While the laws governing LLCs are set forth in statutes that vary from state to state, there are several common characteristics that apply in all jurisdictions.

How to Transfer Ownership of an LLC to a Corporation

Limited liability companies and corporations are both governed by state law. LLCs have members who own the company and corporations have shareholder owners. If you are a member of an LLC, you might be able to transfer your ownership interest in the LLC to a corporation. It depends on your state, the provisions of your LLC agreement, and the purpose of the limited liability company.

S Corporation Structure

An S corporation is a tax designation that a business must apply for with the Internal Revenue Service. Used for small businesses, the benefit of the S corporate designation is that it allows the business to be taxed as a partnership. To apply for S corporate status, the business must submit a completed Form 2553 within 2 months and 15 days after the beginning of the first tax year that it wants to be treated as an S corporation.

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