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What is the difference between a Partnership and LLC?

by Shakeria Northcross, Esq.


Choosing a business entity that will best serve your goals as an entrepreneur is important. People often wonder, "What are the benefits of a partnership versus a limited liability company (“LLC”)", "Should I form a LLC or partnership," and "How do I start a LLC or partnership?" Let’s discuss it!


Partnership

Generally, a partnership is formed when two or more people conduct business for profit, regardless of whether they intended to form a partnership. Depending on the state, the partnership usually has general partners and limited partners. 


General partners run the partnership and have unlimited liability for the partnership’s liabilities and debts. This means that a creditor could take the general partners’ personal assets, such as their house, car, electronics, etc., to pay for the partnership’s liabilities and debts.


On the other hand, limited partners do not have any real authority when it comes to running the partnership; they are basically silent owners who invested in the business. As long as limited partners do not actively participate in the operations of the partnership, they enjoy limited liability protection to the extent of their investment in the partnership.


Partnerships are generally taxed as “flow-through” entities. This means that the partnership itself is not taxed at the entity level, instead, the partners report the partnership’s profit and losses on their individual tax returns.


LLC

A LLC has qualities of both partnerships and corporations. Generally, a LLC is formed after the proper documents have been filed with the state. Unlike a partnership, a LLC can have one or more members. The members of a LLC each enjoy limited liability, meaning a creditor could not easily take their personal assets to pay for the LLC’s liabilities and debts.


LLCs are also taxed as “flow-through” entities. However, depending on the number of members, by default a LLC could be treated like a sole proprietorship (“solo”) or a partnership. Moreover, if qualified, a LLC could elect to be taxed as a Subchapter S-Corporation/Small Business Corporation (“S-Corp”) or Subchapter C-Corporation (“C-Corp”).


Which entity do you think would better serve your goals as an entrepreneur?


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