One of the most daunting prospects for any budding entrepreneur is the question of legal structure. How can you structure your new company to pay taxes and do business legally in your state when you don’t yet have a great mental picture of how your business will operate?
This is a difficult question for sure, but one that we nevertheless will answer in this article. The two most popular legal structures for small businesses, LLC’s and partnerships, will face off in a battle of their pros and cons. You’ll learn that the answer for the age-old LLC vs. partnership question depends on your goals for your company, and the differences between LLCs and partnerships appeal to varying kinds of companies.
Types of Partnerships
There exist many types of partnerships, so because we can look at differences between LLCs and partnership, it’s important that we consider all of the different types.
In a general partnership, all partners assume personal risk and liability for the business. That means that if by any chance the business goes under, personal assets could be on the line.
In a limited partnership, there is at least one general partner and one or more limited partner. The primary difference between a limited and a general partner is that the limited partner does not assume any personal liability. Even if the company ends up declaring bankruptcy, the limited partner’s personal assets are protected. Obviously, limited partners typically earn less and have a smaller say in company operations, as they aren’t putting their neck on the line in the same way that a general partner might be.
Types of LLC’s
All LLC’s start out the same way, but then can transition to different structures once they are an operational. The first such structure is a C corporation. In a C corp, the company is subject to double taxation. Whenever the C corp receives profits, it’s taxed at the business level, and then when individual shareholders take those profits into their personal accounts, the income is taxed at a personal level as well.
However, C corporations allow much more complicated levels of ownership as well as no restrictions on international activity. If these options are appealing to you, then you need to create an LLC.
An S corporation, on the other hand, is not subject to double taxation. This may seem more attractive at first, but one hast to remember that an organization has to meet a stringent set of criteria before the LLC can be transitioned to an S corp. These criteria include restrictions on foreign ownership and activity, number of shareholders, and industry.
In Summary: LLC vs. Partnership
In summary, the LLC vs. partnership debate is settled when you recognize that LLC’s are far superior to partnerships in a certain way: they allow you to quickly and easily transition to a much more complicated organization. If you’ve got plans to take your company to the next level in a short amount of time, then an LLC is the right option for you.
If instead, however, you decide that a small business operation is what is most fulfilling for you, then consider a limited liability partnership. Partnerships are less complicated to register and run than an LLC, but still come with the benefit of limited partners not having to assume personal liability.
Which one will you decide to go with? Comment your choice below, and make sure you subscribe for more startup advice!