General Partnership vs LLC – Differences & Which One is Best for You?
When starting a business, one of the first and biggest decisions you will need to make is choosing your business structure.
This is important because it can have a big impact on your tax liabilities and business ownership.
Understanding the different business structures will help you determine which one is going to be the best fit for your business.
Two of the most popular business entity types are General Partnerships and LLC’s.
Today we are going to discuss the major differences between a General Partnership vs LLC Differences & Which One is Best for You.
Knowing the difference can help you decide which route to take when forming your business.
Let’s get started!
General Partnership vs LLC – Differences & Which One is Best for You:
What is an LLC?
An LLC is a popular and safe option for most small business owners.
It provides a flexible business structure and is fairly simple to set up.
Why business owners choose an LLC:
- Business owners are not liable for the company’s debts and can choose their own management structure.
- They qualify for pass-through taxation – meaning that profits are only taxed once.
Before forming your business, you will need to decide on a business structure: LLC, Corporation, S-Corporation, Nonprofit.
Each business structure has its own advantages and features but for the majority of small businesses, an LLC is going to be the best choice.
LLC’s are simple, flexible and protect your personal assets.
An LLC (limited liability corporation) is a business structure designed to protect business owners from being personally liable for the company’s debts or other liabilities.
Furthermore, LLC’s can be owned by more than one person known as LLC “members”.
If the business doesn’t do as well as planned or you have a rough year, you as the business owner are personally protected under an LLC.
For example, if your LLC declares bankruptcy or is sued, your personal assets such as your vehicle, personal bank accounts, and house are safe.
Single-member LLC’s are pass-through entities which means that profits and losses from the LLC are “passed through” to you and taxed as personal income.
This benefits you because you are not required to pay both corporate and personal taxes on your earnings.
Multi-member LLC’s are taxed as partnerships and are also pass-through entities.
This means each owner pays personal income taxes on their portion of the profit.
Benefits of an LLC
- No member limit
- Personal asset protection – as mentioned above, your personal assets are protected should your LLC go bankrupt or be sued.
- Pass-through taxation benefits
- Simple to set up and maintain – no annual meetings, formal officers, or complicated records.
- Flexible – LLC’s have very little restrictions regarding the company’s structure. You decide if you want your business to be a single member LLC, multi-member LLC, and so on.
- LLC’s are a widely recognized business structure and bring credibility to your organization.
- Access to financing – Once your LLC is formed, you can start to build a credit history which opens the door to business loans and financing to grow your business.
- Flexible profit sharing – LLC’s can choose how they want to do their profit sharing, they are not required to be equally distributed among members.
What is a General Partnership?
Before we define a General Partnership, let’s first talk about what is required to even form one.
A general partnership must satisfy the following conditions:
- The partnership must include two or more people.
- All partners must agree to any liability that their partnership may incur.
- The partnership should ideally be memorialized in a formal written partnership agreement, though oral agreements are valid.
If you already know that your business is going to only have one owner, then an LLC is going to be the business structure you will most likely choose.
If your business is going to have two or more owners, then keep reading to learn more about general partnerships.
A general partnership is a business arrangement by which two or more individuals agree to share in all assets, profits, and financial and legal liabilities of a jointly-owned business.
In a general partnership, partners agree to unlimited liability, meaning liabilities are not capped and can be paid through the seizure of an owner’s assets.
Furthermore, unlike an LLC, any partner may be sued for the business’s debts.
So if there seems to be so much liability with a general partnership, why do businesses choose it?
When individuals form partnerships, they are taxed just like a sole proprietorship.
Each partner must include their business income on their personal tax return and they can deduct business losses on their individual tax return as well.
This is called a “pass through” entity because the profits and tax obligations pass through the company to the partners where income is divided according to their agreement.
With general partnerships, each partner tends to have “more on the line” because they are more liable than an LLC.
Often times this leads to more involved managers who look out for the best interest of the company.
It also often requires a majority vote for major business decisions.
Benefits of a General Partnership
- Although you often operate under a partnership agreement, you are not required to file one with the state and no laws require one in writing.
- Offer participants the flexibility to structure their businesses however they see fit, giving partners the ability to control operations more closely.
- Less expensive to form compared to a Corporation or LLC and involve less paperwork
- Pass-through taxation for all members – taxed just like a sole proprietorship.
- Members have the option to take on limited partnership. Limited partnerships, as their names suggest, subject partners to less liability. In a limited partnership, there are one or more general partners and one or more limited partners, which spreads liability across everyone involved.
Similarities between LLC’s and General Partnerships
Both are initially started by registering with the state in which the company intends to operate.
- Neither is subject to paying taxes. Otherwise known as pass-through taxation, the responsibility for filing a tax return is the job of each individual member or partner.
- Both partnerships and LLCs distribute profits and losses directly to their owners and partners.
Differences between LLC’s and General Partnerships
In terms of liability, an LLC is always going to be a better choice because it limits the liability of you and your partners.
One of the key differences between a general partnership vs LLC is that members are equally liable for debts and losses made through the business.
In this case, creditors can go after each members’ personal assets, unless the partnership has any limited partners.
This also means that each member is liable for the debts and other actions executed by a partner.
Hopefully this artciles on General Partnership vs LLC Differences & Which One is Best for You helped you better understand what each one means for your business.
When deciding on a business structure, there is no wrong or right answer.
The decision should be made based on which type of business structure provides the best set of advantages for your unique business circumstances and goals.
If you aren’t sure what to choose, you can always consult a lawyer or accountant to help guide your decision.
If you already know which business structure you want to use, checkout these business formation services to help you complete the process!
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