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FORM A PARTNERSHIP

LIMITED LIABILITY COMPANY (LLC) vs. PARTNERSHIP

There are some differences between an LLC and a partnership that you should consider before deciding which is better for your business. Keep reading to learn more about how LLCs and partnerships are similar and different. A Limited Liability Company (LLC) is a popular business legal form, and it has many similarities to the partnership legal form.

What is a Partnership?

A partnership is a business relationship between two or more people with a common goal. Each partner contributes to the business and has a percentage of the total business equity. The Partnership operates under a partnership agreement, and there is usually a managing partner who handles the day-to-day operation.

What is an LLC?

A limited liability company (LLC) is a type of business legal entity that combines liability protection with the operations of a partnership. An LLC can have one or more owners, called members. Each member has a percentage of the equity (ownership) of the business. The members operate the LLC following an operating agreement. The LLC members can turn over day-to-day management to a manager, like Acacia Business Solutions, or manage the business themselves. LLCs are sometimes incorrectly called limited liability corporations, but they are not a type of corporation. An LLC is taxed either as a corporation, s corporation, or an LLC; however, it operates as an LLC in either case.

LLC and Partnership Formation

Both LLC and Partnerships require registration with the state where the business operates. That is the extent of their similarities.

Forming an LLC

Like a partnership, an LLC registers with the state it operates. The business files articles of organizations with the Secretary of state. Some states have restrictions on particular types of partnerships, so it is wise to check with your Secretary of state before starting the process.

A Partnership

Depending on the partner’s profession, goals, need for liability protection, management responsibility, and investment goals, there can be several different types of partnerships. Unlike a Limited Liability Company, which typically issues membership Certificates, the partners share directly in the profits and losses of the business, depending on their percentage interest. And in most cases, assume the liability of the Partnership

Legal Liability and Debt

Liability protection is the most significant difference between partnerships and LLCs. Limited Liability Companies generally are designed for liability protection; however, only some types of partnerships grant limited liability.

Liability Protection in LLCs

In contrast to Partnerships, an LLC’s purpose is to provide liability protection to its members. In most circumstances, LLC members are only liable for the debts of the business entity to the extent of their investment, which means that they could lose only that amount that they invested into the LLC.

Liability Protection in Partnerships

In a general partnership, each partner has personal liability for the Partnership’s debts because each partner actively participates in managing the business. In addition, each partner has personal liability for the actions of all the other partners. General partnerships aren’t typical for this reason. Although Some types of alliances have liability protection, not all states allow this protection for limited and limited liability Partnerships.

When Can LLC Members or Partners Have Personal Liability?

There are some circumstances when LLC members or partners in a limited partnership or limited liability partnership can have personal liability. This can occur if the corporate veil is pierced. Meaning that the separation between the individual and the company is the same. These actions include:

  • Combining personal and corporate assets, such as bank accounts
  • Excessive control or misconduct (fraud or activities not authorized)
  • Mismanaging the affairs of the LLC

Members and partners are also liable for debts of the business if they sign to be responsible for those debts.  For example, if an LLC purchases a building and an LLC member signs a personal guarantee for the mortgage, the member is liable for the loan, assuming the LLC can’t pay.

Income Taxes

Partnerships and LLCs are pass-through taxing entities, meaning for both types of businesses, the income taxes pass through to the owners (partners or members) on their 1040 tax returns.

Taxes for LLC Members

Single-member LLCs are taxed in the same way as sole proprietors, filing a Schedule C as part of their 1040 tax returns. Multiple-member LLCs are taxed in the same way as partnerships, passing through the income or loss to each member’s 1040 tax return using the Schedule K-1. LLCs may elect to be taxed as a corporation or S corporation. In this case, the LLC is still operated as an LLC, not as a corporation. Partnerships don’t have this tax option.

Taxes for Partners

A partnership files a partnership tax return every year on Form 1065, but no tax is due by the Partnership. Each partner file the K-1 that they receive from the Partnership as part of their 1040 tax return.

Records for Partnerships and LLCs

Unlike corporations, partnerships have no specific state requirements for keeping records of partnership activities or minutes of partner meetings. An LLC has some requirements to keep records and to hold meetings. Check with Acacia Business Solutions to determine what the conditions, if any, are for your state. For legal advice, contact a licensed Attorney.

Frequently Asked Questions (FAQs)

Compare the difference between a limited liability partnership and a limited partnership?

Limited partnerships have one person with unlimited liability; this person usually has day-to-day control over the business administration. The rest of the partners have limited liability. A limited liability partnership gives all partners limited liability. In this case, the company hires someone to run the business.

Is an LLC better than a partnership?

You may prefer an LLC over a general partnership because the LLC member has limited liability when the general partners don’t. Some states allow individuals to form limited liability partnerships. In this type of business entity, all partners are exempt from liability for the Partnership’s debts and actions of other partners. For this reason, some professional firms, attorneys, and CPAs prefer the LLP form.

How does a corporation compare to an LLC or Partnership?

The most crucial difference in these businesses is ownership and taxation. Owners of corporations are shareholders who receive ownership shares, and they may receive and be taxed on dividends. On the other hand, LLC members and partners in partnerships are considered self-employed. Therefore, they may be subject to self-employment tax, Social Security, and Medicare taxes on the income. Because they don’t receive paychecks, they may be required to make quarterly estimated tax payments that include income and self-employment taxes.

Commonly Used Entities in place of Limited or Limited Liability Partnerships

We find that many customers select a Limited Liability Company (LLC) instead of a Limited or Limited Liability Partnership for the following reasons:

  • An LLC allows all members to protect their assets.
  • LLC members enjoy pass-through taxation. They can report business profit and loss on their 1040 tax returns.
  • The Operating Agreement determines the management of the LLC.

What do you need to do to form a Partnership?

Two or more people come together to form a new business for the same result in a partnership. A Limited Partnership is a partnership with one or more General Partners who manage the day-to-day operations of the Partnership and one or more Limited Partners who are like “silent partners” investing either capital, labor, or both. (Certain partners may enjoy liability protection in a Limited Partnership arrangement. These limited partners have limited liability for business debts and obligations). General partners manage the company and have unlimited personal liability for judgments against the business. Partners can contribute money, but they can also contribute business experience. All partners act towards the same agreed-upon goal and share the profit and losses in an agreed-upon share. Each partner is legally responsible for both their actions and the actions of other partners in the business. Any partner’s activities and statements to third parties are considered a promise made by all the partners.

Registering for a partnership is simple; creating a partnership agreement, on the other hand, is a lengthy process to make it legally authorized. This process should include:

  • Discuss the business details face to face with all your partner(s). Discuss and agree on the goals and objectives of the business, what products and services you will offer, where to operate the company, and the role of each business partner in growing the business. Go over these Partnership deal details with Acacia Business Solutions’ staff, your Attorney, and CPA.
  • Decide what kind of Partnership is best for the business, Limited Partnership or Limited Liability Partnership.
  • After deciding on the type of Partnership, the next step would be for Acacia Business Solutions to complete the Application for your EIN (or Employer Identification Number) used for the Partnership. The EIN is needed for you to open bank accounts in the business’s name, pay employees, and register with the state where you will operate.
  • Draft and sign the Partnership agreement
  • Acacia Business Solutions will register your Partnership, listing all owners and filling in the appropriate state.

ACACIA BUSINESS SOLUTIONS CAN HELP!

 With over 40 years of corporate, LLC, business, trust management, and consulting experience, our staff and senior advisors have the experience necessary to assist you through the process. Many individuals chose a Limited Liability Company, S. Corporations, or Trusts rather than a Partnership. If a partnership is a choice, all the partner’s situations must be considered and evaluated. Acacia’s plethora of transactional cases to pull from provides our clients with the necessary insights to make informed decisions, avoiding unwanted problems and catastrophes. Acacia’s consulting and advisory service is available at reasonable rates, click here.

HOW TO ORDER PARTNERSHIP ASSISTANCE FROM ACACIA BUSINESS SOLUTIONS&lt

  • Speak with an advisor and explain your situation and Partnership agreement and goals at 775-841-1876, our hours of operation are Monday – Friday from 8 a.m. to 5 p.m. Pacific Standard Time.
  • Sign our contract and complete invoiced payment online or by phone, $1000.00 minimum retainer. Billed at consulting rates, click here
  • Email documents that need to be reviewed, if applicable. info@acaciamanagement.com

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