What are the differences between LLC and Partnership business structures? The key differences relate to liability protection, formation requirements, and management structure. There are three types of partnership to choose from – General Partnership, Limited Partnership, and Limited Liability Partnership. Below we cover all you need to know about LLC vs Partnership.
LLC vs PARTNERSHIP GUIDE
What’s the difference between an LLC and a partnership? LLCs and partnerships are both types of business structures. Business structures are used to determine how a business will be operated and managed.
The type of business structure you choose will determine how your business will be run on a day-to-day level, how it will pay taxes, and how much protection your personal assets have from the debts of the company. You should choose a business structure that gives you the best balance of legal protections and financial gain.
To assess the differences between an LLC and a partnership we first need to understand how each of these company structures work. An LLC is a type of business structure that is similar to a sole proprietorship – but offers its owners limited liability protection.
A partnership is a simple business structure that allows two or more people to form a business together. There is more than one type of partnership option available. We will take a look at these options in more detail below.
JUMP TO CONTENT
- WHAT IS AN LLC?
- WHAT IS A PARTNERSHIP?
- 3 TYPES OF PARTNERSHIP
- LLC vs GENERAL PARTNERSHIP
- LLC vs LIMITED PARTNERSHIP
- LLC vs LIMITED LIABILITY PARTNERSHIP
- FREQUENTLY ASKED QUESTIONS
WHAT IS AN LLC?
An LLC is a business structure that combines some of the elements of a corporation with those of a partnership or sole proprietor. An LLC protects the assets of the owners from debts incurred by the business.
In most cases, the personal assets of the company owners cannot be pursued if the company is sued or to cover company debts. Another key benefit of an LLC is its pass-through tax structure. This means all company profits are passed through to the company owners without having to pay corporate tax.
The earnings are then taxed as part of the owner’s individual income tax return. Members of an LLC are considered self-employed and must also pay employment taxes such as Medicare and social security tax. For more see How LLCs Are Taxed.
An LLC is considered a good choice for medium to high-risk businesses. They offer protection for the personal assets of their owners and the companies pay less tax than corporations. For more, see – What Is an LLC?
WHAT IS A PARTNERSHIP?
A partnership is a business structure that involves a formal arrangement between two or more people to manage a business and share in its profits. The individuals that form a partnership agree to work together to advance their mutual interests and are known as business partners.
Partnerships can be formed by individuals, businesses, interest-based organizations, schools, and governments. To understand the pros and cons of an LLC vs partnership we need to take a look at the different types of business partnerships.
THREE TYPES OF PARTNERSHIP
There are three types of partnership business structures. They are General Partnership (GP), Limited Partnership (LP), and Limited Liability Partnership (LLP). To compare an LLC vs partnership, we need to understand the differences between the three types.
GENERAL PARTNERSHIP (GP)
A general partnership is a simple business structure that exists when two or more people go into business together but don’t register the business with their state. It is an unincorporated business structure whereby the business owners share responsibilities.
The owners of a general partnership have unlimited personal liability for the debts and obligations of the business. This means their personal assets are not protected and can be used to cover debts run up by the business.
When a partnership is formed, the owners should write and sign a partnership agreement. This is a contract that formally outlines how the company is to be run. It will include details covering the responsibilities of each owner, how profits are to be distributed, and owner voting rights.
LIMITED PARTNERSHIP (LP)
A limited partnership structure has two types of partners. There are General Partners and Limited Partners. General partners run the company and take responsibility for the day-to-day operations and managerial decisions. They have full control over the company but also accept full liability.
General partners have unlimited liability. They are personally liable for all the debts and obligations of the firm. This means the personal assets of a general partner can be seized to cover debts or any legal action taken against the company.
Limited partners on the other hand have limited liability protection. They are not personally liable for the debts of the company beyond the investment they make in the business. Limited partners are sometimes referred to as silent partners and have no involvement in the day-to-day operations or management of the company.
LIMITED LIABILITY PARTNERSHIP (LLP)
The third type of partnership is known as a Limited Liability Partnership. A limited liability partnership is similar to a limited partnership except it gives limited liability protection to all owners. It is a business structure often used for professional businesses such as legal, accounting, and architecture firms.
About 40 states across the US allow the formation of LLPs but the laws that govern how they are formed and run vary from state to state. If you plan on forming an LLC you should consult a professional for advice on how to form the company in your state.
An LLP operates just like a general business partnership. Operational and management responsibilities are divided between all partners. And, a partnership agreement should be written to formally define how the LLP will be run.
In most cases, a limited liability partnership provides personal liability protection to all members of the LLP. Each member of the partnership is liable only for their own actions. Partners cannot be held responsible for the mistakes of another partner.
The rules governing LLPs vary from state to state. And, some states will hold partners responsible for the debts of an LLP partnership. Some states require an LLP to take out liability insurance or to post a bond as financial security.
LLC vs GENERAL PARTNERSHIP
First up, let’s take a look at LLC vs General Partnership. What are the differences between an LLC and a General Partnership?
There are no formation requirements for a general partnership. When two people go into business together and don’t register as a company – they automatically create a general partnership.
Forming an LLC requires a series of steps to be taken, paperwork to be filed with your local secretary of state, and fees to be paid. There are then annual company reports to be completed, a registered agent to be appointed, and recurring maintenance fees to be paid. Forming a general partnership involves none of these steps.
An LLC can be owned by one or more people. But a general partnership must have two or more owners. The owners of an LLC are called members. Members can choose to run the company themselves – this is called a member-managed LLC.
Or, they can appoint managers to run the company in a manager-managed LLC. Members should write and sign an Operating Agreement to formally cover all the details needed for the running and management of the company.
A general partnership has a much more informal management structure. It can be run using a written or verbal agreement between two or more members. To avoid conflict it is recommended that partners write and sign a partnership agreement. This document covers all aspects of how the general partnership will be run.
A general partnership has no formation or maintenance costs. However, an LLC does. The maintenance costs of running an LLC vary from one state to the next. But you can expect to pay fees when you file annual reports.
Additionally, you may require business licenses to run your company and these generally come with a fee. You may also be subject to franchise taxes and other LLC maintenance fees depending on the state your company is registered in.
LLC Maintenance Costs
- Franchise Tax
- Annual Report Fees
- Business License Fees
The biggest difference between an LLC and a general partnership is liability protection. An LLC protects its members from the debts of the company. The members of the LLC have liability protection and in most cases, their personal assets cannot be used to cover company debts.
A general partnership does not offer any liability protection. The owners of a general partnership can be held personally responsible for the debts of the partnership business. This means their personal assets such as home and bank accounts can be seized to cover the partnership’s debts.
Both an LLC and a general partnership benefit from pass-through taxation. This means the business does not pay any business taxes on earnings. Everything passes through to the owners without having to pay tax. Owners are then taxed on these earnings as part of their personal income tax return. For more check out the Tax Benefits of LLC.
LLC vs LIMITED PARTNERSHIP
What are the differences between an LLC and a limited partnership? Let’s take a look at the key features you need to be aware of in an LLC vs limited partnership.
The formation process for an LLC and a limited partnership is very similar. The precise steps you will have to take may vary from state to state but in general, you will have to complete the following steps.
For an LLC you will have to complete and file your company’s Articles of Organization with the state secretary. You will have to pay a fee and appoint a registered agent for both an LLC and LP. At this point, it is good practice to write an Operating Agreement detailing how the company will be run.
For a limited partnership, you will have to file a Certificate of Limited Partnership with your state’s secretary of state office and pay a fee. You and your partners should then write and sign a Partnership Agreement to document how the company will be managed.
The management structure of an LLC and a limited partnership have some similarities. For instance, an Operating Agreement is written to formally establish how an LLC company will be managed. And, for a limited partnership, a Limited Partnership Agreement is created.
These internal documents serve as legal contracts binding owners to the agreement. They can be used to resolve future conflict and they cannot be altered unless a unanimous agreement is reached by all owners. However, big differences exist between the involvement and power owners have for an LLC versus a limited partnership.
An LLC can be member-managed whereby the owners run the company themselves. Or, it can be manager-managed whereby the owners appoint a manager or group of managers to run the company.
A limited company has two types of partners – General Partners and Limited Partners. General partners have full control over how the company is run. They handle the day-to-day operations and make all the managerial decisions. Limited partners have no involvement in the management of the partnership. They are sometimes referred to as silent partners.
Limited partnerships have investors and this means they are subject to many of the same operational requirements as corporations. Limited partnerships issue ownership shares in a similar way as an S-corporation or C-corporation. However, the shares are known as limited partnership units.
Limited partnerships are required to hold investor meetings. All partners must be given access to financial records and other important company records. And, in some states, limited partnerships must publish annual reports just like an LLC.
An LLC uses an Operating Agreement to formally define how the company will be run and managed. This document is a legal contract between owners. Although it is not required by law it is highly recommended that every LLC creates one from the outset. It is a useful tool for resolving conflict and for protecting the limited liability status of an LLC.
There is a big difference between an LLC and a limited partnership in terms of liability protection. In an LLC, all members benefit from liability protection. This means their personal assets are protected against the debts of the company.
In a limited partnership, only the limited partners benefit from liability protection. These members stand to lose only the investment they have made in the business – their personal assets are protected. However, the general managers of a limited partnership do not have liability protection. Their personal assets are not protected and can be seized to cover any debts run up by the business.
Both an LLC and a limited partnership benefit from pass-through taxation. This means the business itself does not pay tax on the earnings it makes. For both an LLC and an LP all the earnings are passed through to the company owners. They then pay tax on these earnings in their personal income tax return.
LLC vs LIMITED LIABILITY PARTNERSHIP
The final type of partnership is a Limited Liability Partnership. What are the differences between an LLC and a limited liability partnership? Let’s take a look at LLC vs LLP.
The requirements for forming a limited liability company differ from state to state. However, in general, you’ll need to complete the following steps. To form an LLP you’ll have to file a certificate of limited liability partnership with your secretary of state.
You can also expect to have to appoint a registered agent for the partnership and obtain any licenses and permits required to run and operate your business. And, although not a legal requirement it is highly advised that you create a limited liability partnership agreement.
Forming an LLC follows a very similar series of steps. To form an LLC you will have to file your articles of organization with your state authority, pay a fee, and appoint a registered agent for your LLC. You will also have to apply for any required business licenses and pay a fee.
As outlined above an LLC can have one or more owners, known as members. The company is either run by its members, (member-managed), or by appointed managers, (manager-managed). An operating agreement is written to formally document the responsibilities and powers of all members.
On the other hand, a limited liability partnership is run according to its partnership agreement. This document outlines the roles and responsibilities of each partner, their financial contributions, and how profits will be distributed.
An LLC can have one or more owners while a limited liability partnership must have at least two owners. The precise rules that govern how a limited liability partnership is to be run vary from state to state. You should check with your local state authority for clarification on how an LLP is to be managed in your local jurisdiction.
LLP VARIATIONS BY STATE
There is a large degree of variance from state to state concerning the legalities of an LLP, the level of liability protection it affords its partners, and the amount of tax it pays.
Not all states allow the formation of a limited liability company. And, some allow only certain professionals to form an LLP. For example, in New York, California, and Nevada only certain licensed professionals such as attorneys, accountants, and architects can form a limited liability company.
If you are considering forming a limited liability partnership our advice is to seek professional advice from the likes of an attorney. This way you can establish the legal requirements for an LLP in your state and determine if the business structure is a good fit for your company.
In most cases, a limited liability partnership offers liability protection to all partners. This means that the personal assets of a partner cannot be pursued to cover the debts of a company. Their individual liability is limited to the capital investment they have made in the partnership. However, this is not the case in all states.
Some states hold partners personally liable for business debts but not liable for the negligence or misconduct of a partner. And, other states stipulate the appointment of a general manager that is personally liable for company debts.
If you are forming an LLP you will need to review the liability legalities for the state you are forming in. Better still, consult a business professional such as an attorney for legal business advice.
A limited liability partnership benefits from pass-through taxation in the same way as an LLC does. This means company earnings do not pay tax at a business level. Instead, all earnings are passed through in full to the business owners. The owners then pay tax on these earnings as part of their individual tax returns.
LLC vs PARTNERSHIP FAQ
WHAT’S BETTER AN LLC OR A PARTNERSHIP?
The best type of business structure for your business is the one that strikes the best balance between benefits, operational requirements, regulatory requirements, and costs. Every business is different – so you’ll need to sit down and compare how an LLC and partnership would benefit your business and then make an informed decision.
WHAT TYPES OF PARTNERSHIP ARE THERE?
There are three types of partnership – General Partnership (GP), Limited Partnership (LP), and a Limited Liability Partnership (LLP).
WHAT’S THE BEST TYPE OF PARTNERSHIP?
The best type of partnership is the one that works best for your particular business and your business partners. There are three types to choose from – a General Partnership, Limited Partnership, and a Limited Liability Partnership. For more information see – Types of Partnership.
DOES A PARTNER IN A PARTNERSHIP HAVE LIABILITY PROTECTION?
The laws regarding liability protection for partners in a partnership vary from state to state. The best advice is to check the rules governing your local state.
However, in general, partners in a limited liability partnership have liability protection in most states. In a limited partnership, limited members are protected while general managers are not. General managers can be held personally responsible for company debts.
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About the Author
Jason Roth: Editor in Chief
Jason is editor in chief at My LLC Guide. He holds a wealth of business management experience and has been advising companies on business formation issues for many years. Jason specializes in resource planning management, staff utilization, and productivity consulting.
He has worked predominantly in the west coast area where he graduated from the Marshall Business School at the University of South California. When he’s not working in his business advisory role, Jason likes to climb on his Indian Scout motorbike and enjoy the open road.