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LLC Vs Partnership – A Brief Comparison

  • March 12, 2021
  • 1.6K views
  • 5 minute read
  • Meg Rivera
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There are several things one must consider when choosing between LLC vs Partnership.

LLC Vs Partnership – A Brief Comparison

Things such as personal liability, business management and ownership, the costs of registering and forming the business, and taxation are all things to keep in mind.  Our LLC vs partnership comparison guide will look at both options to help you decide.

Preliminary Considerations

Whether you have a business partner is the first major consideration. You need a partner to form a partnership. If you don’t have one, you’ll need to create an LLC.

Partnership Variations

Several different business types involve a partner in some capacity. Here are the main differences between them;

  • General Partnership

This is when two or more people own and run the business as joint owners. The individual partners have equal rights to the business. They also have personal liability for business obligations, as they would if they were sole operators.

  • Limited Partnership

This is when two or more people own a business, but they have different ownership “levels.” There are general partners who own the business and run it with full personal liability and limited partners.

Limited partners invest assets such as money or property into a business but don’t have the right to make business decisions. They are also not liable for business debts.

  • Limited Liability Limited Partnership

An LLLP is similar to a limited partnership but the general partners have limited liability too. As with a standard limited partnership, there are two partnership levels; general partners and limited partners. Both groups have limited liability in the business.

What is an LLC?

An LLC refers to a Limited Liability Company. An LLC is closer to a corporation than a partnership. You can create an LLC with only one person, allowing you to act as a sole proprietor with less personal liability.

Compared to a standard corporation, an LLC uses members instead of shareholders. Directors and officers are replaced with managers. If you want to have more control of your LLC, definitely think about creating an LLC agreement with the other members.

Partnership vs LLC

An LLC is the better option when it comes to liability. You can form an LLC with your partners and limit personal liability. The downside is that forming an LLC has a greater upfront cost.

Limited Partnership vs LLC

An LLC is preferable over a limited partnership as an LLC offers all owners personal liability protection. However, it may cost more time and money to form an LLC given all of the paperwork, filing fees, and legal fees.

Every member of an LLC has some say in how businesses are managed, while limited partners in a partnership have no control. If you believe a limited partnership would be better for you, you can still form an LLC and name yourself the general partner to limit personal liability.

There are several reasons to form an LP over an LLC, including;

  1. You don’t want investors to have control over the business
  2. You don’t mind having personal liability for the business
  3. You want the financial savings of forming a limited partnership

Limited Liability Partnership vs LLC

While the people involved with a limited liability partnership have some limited liability, an LLC offers more comprehensive liability protections. However, not every state allows for the formation of an LLP.

Some states also restrict LLPs to certain professions, typically accountants, architects, engineers, and lawyers. These people are prohibited from forming an LLC. Some states use different terms as well, calling it a Registered Limited Liability Partnership (RLLP) or Professional Limited Liability Partnership (PLLP).

LLLP vs LLC

An LLC and LLLP offer similar personal liability protections. If you live in a state that allows LLLPs then there are several reasons to choose one over an LLC, such as;

  1. You don’t want other investors to have control over the business
  2. You don’t have any plans to operate in states that don’t recognize LLLPs
  3. You stand to save money by forming an LLLP

Other Differences

You should get familiar with the business entity laws for your state before choosing a business type. You can find the information you need through the state agency for regulating business, typically a division of the Secretary of State.

  • Registration Fees

Businesses typically have to register with the state upon formation. You may also need to register the business name (not the names of your or your partners) which is called an assumed or fictitious name. You may have to pay registration fees for filing this information. Different states have different fees.

  • Paperwork Requirements

The paperwork requirements vary by state and business type. These documents are needed for registration and taxation purposes.

  • Securities Regulations

Limited Partnerships rely on securities such as stocks and shares. If your business has less than ten limited partners (or 35 for some states), all of whom you know and live in your state, then you generally don’t need to worry about securities laws. Even so, it’s worth knowing about the laws and finding out for sure if you are subject to them or not.

  • Taxation

While LLCs and partnerships can make allowances for profits to be passed through owners and taxed to them rather than the business, you might still have to deal with taxation depending on your business type.

You should consult a qualified tax advisor to learn more about what is expected of you and your tax obligations.

Conclusion

The differences between an LLC and a partnership aren’t too great. For the most part, an LLC is generally preferable to a partnership. However, you should consider all the factors at play. You might find it makes more sense to form a partnership over an LLC.

If you want more control over the company and are comfortable accepting the liability that comes with that, then a partnership could be right for you.

If you would prefer more personal protection and are comfortable sharing your business, then an LLC (or whatever your state calls it) would be best.

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