Understanding LLC and Partnership Business Structures

Establishing a business needs constant planning and decision-making. As you master the planning part, the next crucial challenge is choosing the right structure for your business. This part is not as easy as choosing a business loan! To choose the right structure from a list of best is always a daunting task. With a proper vision and aim, you can also master this part.

Here is a guide to help you learn more about the top two business structures.

LLC

The Limited Liability Company (LLC) is a business structure which legally limits the personal liability of its members. It ensures that the members cannot be held personally responsible for business debts and liabilities in most cases. To form an Limited Liability Company, you must register with the state in which the business wants to operate. It also allows for pass-through taxation since the income earned is not taxed at the entity level. The LLC's work under an operating agreement. This agreement defines member percentages and answers other types of questions. The profit and loss are distributed directly to the owners.

Liabilities: Limited Liability Company is a separate legal entity from its members. Hence, It offers personal liability protection for the members. If the business faces any debts or legal actions, the members are only responsible for their part of the investment into the business. But, the members can have personal liability if they sign to be responsible for such debts.

Taxes: IRS doesn't recognize Limited Liability Company as a taxing entity. Multiple-member LLCs are taxed like partnerships, while single-member LLCs are taxed as sole proprietors.

Records: The LLC's must submit reports to the respective states periodically. They must also maintain strict separation from the personal affairs of members. If not, the LLC members may become personally liable for LLC activities.

Partnership

If a business has two or more individuals as co-owners, it is referred to as a partnership. This structure is considered as pass-through entities as there is no legal distinction between the owners and their business. You must register with the state to form a partnership.

Depending on the percentage of shares, the partners share the profits and losses of the business, unlike LLC's. The share percentage is a part of the partnership agreement.

Liabilities: In partnerships, partners have personal liabilities over the debts. The actions of one partner can also affect the other. It doesn't offer personal liability protection. Unlike LLC, partnerships have no distinction between the owners’ personal and business finances.

Taxes: Partnerships don't owe business income tax. However, partners report their separate tax returns profit or loss correlated with their ownership share.

Records: Partnerships don't have specific state requirements for keeping records of activities or minutes of meetings. They can work in whatever way they want to.

Though Limited Liability Company and partnerships have so much in common, they also have some differences. Do complete scrutiny on the pros and cons of both the structures. Consider short term and long-term goals and decide wisely.

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