Forming an LLC vs Partnership
What is an LLC?
LLC stands for Limited Liability Company. An LLC can have as many owners as it would like, and those owners are protected against personal liability just like members of a corporation. Owners of an LLC are free to be as involved with the business as they’d like, unlike limited partnerships. The rules of the LLC “partnership” is defined by those involved in the agreement.
“The LLC was created to offer the flexibility of a partnership while providing corporation-like protection against personal liability. One or more of its members can manage an LLC.” – Delaware Inc.
What is a partnership?
There are two types of partnerships: Limited partnerships and general partnerships.
Limited partnerships (LPs) can only invest in their companies – they can’t be involved in the day to day. They do not usually have personal liability for partnership obligations. They are made up of at least 1 general partner who manages and funds a for-profit business PLUS 1 or more ‘limited partners’ who only invest and do not manage the company.
General partnerships (GPs) have unlimited liability and are allowed to run the day to day actions of the company. They involve 2 or more parties who agree to own and manage a for-profit business where management duties and profits or losses are equally shared.
LLC vs Partnership: Formation
LLCs are, in general, easier to form than partnerships. They do, however, usually require more documentation than partnerships – operating agreements, articles of organization, etc. Articles of organization will define an LLCs name, location(s), owner identities, and other statutory requirements.
General partnerships, on the other hand, can be formed in a range of ways – including orally, though that can encourage future litigation. Some states require that GPs file a certificate of partnership. Limited partnerships are a bit more formal, requiring a certificate of partnership and sometimes articles of limited partnership to define partner roles, rights, and requirements.
LLC vs Partnership: Company management
LLCs are managed differently than partnerships. Single-owner LLCs can run the company without approval or consultation with others. LLCs with two or more members can write their own rules and roles, allowing certain members to handle management of the company or allocating that responsibility to all members.
General partnerships are based on the principle that each partner has equal right and say in managing the business enterprise. All partner votes are equal, regardless of capital contribution. This means all business decisions must be approved and voted on by partners in order to be implemented, unlike an LLC.
Limited partners do not manage the business – they only supply funding for the business. The general partners will equally split the management responsibility.
LLC vs Partnership: Legal liability
LLCs provide a way for owners/members to run the company without taking on full, unlimited personal liability. LLC members are not personally liable for company debts or company legal liabilities, but they are still personally liable for their own behavior and conduct (conduct that harms others, breaches duties, etc.).
General partners have unlimited personal liability for their business enterprise because they manage the company. As with LLC members, general partners are also liable for personal conduct as well as the actions of other general partners (called joint and several liability).
Limited partners more closely resemble LLC members when it comes to legal liability. Because their onlycontribution to the company is capital, they are not personally liable for the company’s debts or litigation.
Should you form an LLC or a partnership? If you’re going into business with one or more people, choosing between forming an LLC and a general or limited partnership is tough.
If you and your potential business partners don’t want to risk anything more than your capital investments, perhaps an LLC would be the best option for you because of the limited personal liability this option secures. With the help of an attorney, draft a detailed operations agreement that is satisfactory to all LLC members, as this is what will govern your business relationshipas you move forward.