A limited liability company/partnership refers to two different types of legally recognized enterprise structures. Read on to learn more about these common legal entities, their benefits and how to form one.
The Nuts and Bolts of LLCs and LLPs
A limited liability company (LLC) is the most common type of legal structure for businesses, because they provide the advantages of corporations, but the tax benefits and operational flexibilities of partnerships, according to the IRS. For example, LLCs can have an unlimited amount of individual members, which may even be other companies. Unlike corporations, LLCs do not have to submit state-mandated reports and do not pay taxes because these are processed through individual members’ tax returns. On the other hand, limited liability partnership (LLPs) cannot include corporations as owners, nor can function without an official managing partner. This means that LLPs must designate at least one individual who is officially liable for the actions of the partnership.
Partnership Basics
There are actually three types of partnership structures. First, general partnerships equally divide profits, liabilities and management duties among business partners. Disproportionate profit distributions may be assigned to each business partner in the partnership documentation. Second, limited liability partnerships provide business partners with flexibility, limited legal liabilities and managerial input restrictions. The actual managerial limitations depend on the business partners’ specific investment amount. Third, joint ventures are a general partnership with a designated period of time or project scope. If desired, then can be switched to an ongoing partnership through simply filing the right paperwork. All partnerships must register with the IRS and state revenue agency. They must also obtain a tax ID number and a file annual information return that discloses the income, deductions and gains and losses. Partnerships usually must pay excise and employment taxes, but individual partners are responsible paying income and self-employment taxes.
Why Chose a Limited Liability Company/Partnership?
Most entrepreneurs prefer limited partnerships, because they do not have any liability for debts or obligations outside of their capital contributions. They are not required to participate in management, but they receive a fair share of the profits. Limited partnerships are favored by passive investors, because they are protected assets that are highly marketable when it comes to finding investment partners. They also offer exclusive tax deduction benefits to employees. This means that a partner is allowed to take entertainment and health insurance deductions and the general partner is also allowed to take retirement deductions. There are a few drawbacks, such as legal continuation challenges. If the general partner dies or resigns, the limited partnership may only continue if the remaining general partners unanimously agree to continue the business. Even worse, every state has their own tax regulations, some states do not offer state tax incentives or business advantages.
Related Resource: Tax Credits Available for Small Businesses
What are the Differences between a LLC and a Partnership?
The biggest difference between a limited liability company and a partnership is that LLC’s protect owners from legal liabilities and debt collections. Partners in a partnership will only receive this protection if they specify this in the official agreement. LLC owners must file articles of organization with their state’s business bureau, pay fees and comply with certain requirements before they can even open their doors for business. When choosing between the two, be sure to consider your levels of risk tolerance, financial resources for dealing with a lawsuit and the long-term plans for the company. Those who want a company that protects their personal interests and that can eventually be sold should choose an LCC, according to the Small Business Administration.
