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LLC v Partnership
Two different forms of business organization are limited liability corporations (LLC) and partnerships. There are some significant differences between the two. Understanding these differences and their ramifications is essential to making the best decision for a new company that is just starting up.
A partnership is a form of ownership where the responsibility for the company is shared among two or more partners. The profits from such a company flow through to the income of the partners, so are taxed at the individual tax rates of the partners. The risk that the company has is also borne by the partners. Thus, there is unlimited liability on the ownership, as well as unlimited risk with respect to the profits or losses of the company. How this risk is portioned to the different partners is something that is outlined in the partnership agreement. Yet, it is worth noting that the partners are free to negotiate any arrangement they want, as long as it is understood that they must adhere to the terms of the arrangement.
Certain kinds of businesses are best suited for partnerships. Typically, partnerships are law firms, accounting firms and other such professional organizations. These organizations usually have limited downside risk, so the owners need not protect...
In addition, these types of businesses benefit from the ability to structure the organization in whatever manner the partners want. Thus, the flexibility to utilize the partnership agreement is something that is a key attraction to partnerships for these types of firms.
A limited liability company (LLC) is a structure that is allowed by state, rather than federal, statute. Thus, it is conceivable that some states might not allow LLCs. The owners of LLCs "have limited personal liability for the debts and actions of the LLC." In this respect, the LLC has the feature of a corporation. However, in many other respects, an LLC functions more like a partnership. The tax structure of an LLC is flow-through, meaning that the profits and losses associated with the company are on the personal tax returns of the owners. The LLC is thus not taxed directly. In addition, an LLC also allows for a flexible management structure that the principles can tailor to meet their own needs. In that respect, an LLC functions just like a partnership.
It is worth noting that the IRS does not recognize an LLC for tax purposes. Thus, the LLC must also be a corporation, partnership or sole proprietorship. In order to receive the benefits of…
References:
IRS.gov (2012). Website, various pages, including Limited Liability Company, retrieved April 2, 2012 from http://www.irs.gov/businesses/small/article/0,,id=98277,00.html
And Partnerships, retrieved April 2, 2012 from http://www.irs.gov/businesses/small/article/0,,id=98214,00.html
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