Limited Liability Corporate (LLC) or Partnership Forming

Limited Liability Corporate (LLC) or Partnership

Forming a business may be as simple as shaking another individual's hand or it may be a complex process of filling out forms, paying application fees and taking steps to achieve compliance. The degree of complexity will be shaped significantly by the nature of one's chosen line of business. This, in turn, will define the legal definition of this business. In the discussion hereafter, we consider these distinctions as they apply to a Limited Liability Corporation (LLC) or a partnership.

Limited Liability:

The Limited Liability Corporation is a popular path for many small businesses beginning operations. This is a course to formation frequently taken by companies wishing to formally register as a business but also wishing to protect participants from many of the perils that inherently accompany starting a business. In exchange for these protections, the LLC requires a process of application. According to Carter (2010) "LLCs are required to file articles of organization, also known as a certificate of formation, with the secretary or department of state where the LLC operates. An LLC's articles of organization contains general information about the business, such as the legal business name, principal address and the management structure of the company." (Carter, p. 1)

For many who participate in this type of company, an LLC is a particularly attractive option because of the safety it affords those involved. The implications of 'limited liability' are that legal or civil matters arising from involvement in the business can only penalize the personal holdings of participants to a certain ceiling. According to the text by Carter, "members of an LLC are not personally responsible for business debts and obligations. Each member of the LLC is liable for business lawsuits and other obligations only to the extent of their ownership interest in the company."

This may be especially attractive to entities entering into a business engagement with other entities who are materially unknown to them. In such scenarios, it is not uncommon for partners to find ways to mitigate the potential risks of this unfamiliarity by forming around the right legal protections.

Partnership:

By contrast to the formal channels required for the formation of an LLC, a partnership is more organically initiated. According to Carter, "A partnership begins automatically when two individuals agree to operate a for-profit business with one another. There are no documents that need to be filed with the state to operate as a partnership." (Carter, p. 1)

It is for this reason that another chief difference between partnerships and LLC's is accommodated. Namely, with the partnership, only individuals may qualify as entities. As noted here above, this does distinguish this route from an LLC which, because of its more formal channels of application and formation, is permitted to include a wide range of entity types. This may include other LLCs, corporations, partnerships, foreign businesses and individuals. (Carter, p. 1)

Choosing the Right One:

When deciding whether a Limited Liability Corporation or a partnership is the right path for a business venture, the formality of the endeavor is important to consider. The greater legal hurdles to be cleared in the formation of an LLC may be dissuading to those seeking a more immediate partnership. This approach would result in lesser protections of personal assets but would ultimately result in a partnership that could also be more easily undone. According to Keshav Lal (2005), "dissolution of LLC will require reporting and following of certain legal and tax formalities, whereas Partnership can be dissolved or terminated by without any legal formalities except for filing final tax return."