Should You Get an LLC or Partnership

Written by Wesley Henderson

February 4, 2024

blocks with partnership or LLC on it

A partnership can be complicated entity to setup because you could accidentally exposes yourself to personal liability whereas an LLC is more user friendly and set up to protect personal liability and is setup for new business owners.

The Different Types of Partnerships

Partnerships are diverse business structures that accommodate varying levels of involvement, liability, and decision-making authority among partners.

General Partnership

General partnerships are the most straightforward forms of business partnership. In a general partnership, all partners share equal responsibility for managing the business, as well as liability for debts and legal obligations.

One of the key features of a general partnership is the equal sharing of profits and losses among partners. Besides profit and liability sharing, decision-making authority is typically distributed equally among partners, fostering a sense of collective ownership and accountability.

General partnerships are often favored by small businesses, professional practices (like law firms), and family-owned enterprises due to their simplicity and flexibility in governance.

Some iconic general partnership business examples include:

  • Ben & Jerry’s
  • Patagonia
  • In-N-Out Burger

Limited Partnerships (LP)

Limited partners have limited liability and are typically not involved in the day-to-day management of the business. Instead, these partners contribute capital to the partnership and share in its profits, but their liability is restricted to the extent of their investment.

As a result, limited partners enjoy passive income without assuming the same level of risk as general partners.

Limited Liability Partnerships (LLPs)

Limited liability partnerships (LLPs) combine elements of general partnerships and corporations. As a result, these partnerships offer partners liability protection while retaining the flexibility of partnership structures.

LLPs are commonly chosen by professionals such as lawyers, accountants, and consultants who wish to share resources and collaborate while safeguarding personal assets from business liabilities.

Because of the liability protection offered by an LLP structure, it’s no wonder it’s popular among consulting and law firms, namely:

  • McKinsey and Company
  • Ernst & Young Global
  • Kirkland & Ellis LLP

Forming An LLC

As you can see, parterships can be complicated and with lability exposure you may not intend. For that reason, an LLC is a safer route and almost always preferable (unless a lawyer or CPA is advising you about your specific circumsantces and recommending otherwise).

Register as an LLC

By registering and operating your partnership as an LLC, you and your partners can enjoy the following advantages:

  • Limited Liability Protection: LLCs provide partners with limited liability protection, shielding personal assets from business debts, lawsuits, and liabilities.
  • Pass-Through Taxation: LLCs enjoy pass-through taxation, where business profits and losses are passed through to individual partners’ tax returns. This tax treatment eliminates double taxation at the corporate and individual levels, resulting in tax efficiency and potential tax savings for partners.

Flexibility in Management Structure and Profit Distribution: LLCs offer flexibility in management structure and profit distribution, allowing partners to customize governance arrangements to suit their specific needs and preferences.

Make sure your LLC is filed correctly with Drafted Legal who will file it for you within 7 days.

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