Should I Create a Partnership or LLC?

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Starting and opening a business is an exciting time for all involved. One of the most important aspects of opening a business involves deciding exactly what type of legal entity the business will be. Two of the more common types of legal entities are partnerships and limited liability companies, commonly referred to as LLCs.  Understanding the key distinctions between these entities will allow a business owner to make the best decision possible as to which entity their business will be.

Partnership

A partnership is simply two or more people carrying on a for-profit business as co-owners. Partners in a partnership are personally responsible for the debts and obligations of the partnership, and share both profits and losses with other partners; they do not enjoy limited liability as members in an LLC do.

Partnerships are not a separate legal entity, and thus taxation is “passed-through” to the individual partners. Therefore, the business itself does not pay any income tax, while the partners identify their portion of the profits, or losses, on their own taxes.

LLC

A limited liability company (LLC) is a legal entity in which its members enjoy limited liability, meaning that they are only liable up to the amount of their investment. LLC’s are a product of state statute and must be formed by filing paperwork with the Secretary of State in the state of formation. One of the most attractive features of an LLC is that it combines the pass-thru taxation of a partnership with the limited liability of a corporation. It is also important to note that if you decide to form an LLC, the name must include either “LLC” or “Limited Liability Company”.

Conclusion

In sum, the decision between whether to create a partnership or form an LLC is important in that each type of legal entity has distinct advantages. Creating a partnership is simple, and less expensive, whereas forming an LLC requires filing documentation with the Secretary of State in the state of formation.

If you wish to create a partnership or form an LLC, please contact one of the attorneys at HSC to assist you in making the best decision for your business.