There are two main types of business structures: partnerships and LLCs. Both have their own unique benefits and drawbacks, so it can be tough to decide which is the best option for your business.
What is a Partnership?
A partnership is a business structure where two or more people own and operate the business together. Partnerships are relatively easy to set up, and they offer a lot of flexibility; partners can come and go as they please, and the business can be structured in any way that the partners agree on. However, partnerships can also be quite risky; if one partner dies or decides to leave the business, the other partners could be left in a difficult situation.
What is an LLC?
An LLC, or limited liability company, is a business structure that offers some of the benefits of a corporation, while still being relatively easy to set up. LLCs offer protection from personal liability, meaning that if the business goes bankrupt, the members’ personal assets are not at risk. LLCs also offer a lot of flexibility; members can also come and go as they please, and the business can be structured in any way that the members agree on. However, LLCs can be more expensive to set up as compared to a Sole Proprietorship, which we'll cover later in this post.
Partnership vs LLC: Pros & Cons
When starting a business, one of the first decisions you'll need to make is what business structure to use. There are a few different types of business structures to choose from, but the two most popular are Partnerships and LLCs. Here's a look at the pros and cons of each:
A partnership is a business structure where two or more people own and run the business. Partnerships are popular because they're easy and cheap to set up, and they offer a lot of flexibility. Partners can share responsibilities and profits equally, or they can divide them up however they want.
The downside of partnerships is that they can be tricky to manage. If one partner decides to leave the business, the other partners need to decide whether to let them go or buy them out. If they can't agree on what to do, the partnership can dissolve, which can lead to a lot of confusion and legal hassle.
An LLC is a business structure that's been growing in popularity in recent years. LLCs are similar to partnerships, but they offer more protection for the owners. If something goes wrong with the business, the LLC's owners are protected from being held personally liable.
Although the biggest pro of operating as an LLC is the personal protection you have from your business decisions, there are also other reasons you should choose to operate as an LLC.
Other benefits of operating as an LLC include the ability to expand and bring in other owners if you choose. You can even draw up a Partnership agreement under an LLC. There are many different types of Corporations you can set up once you have an LLC established.
Not to mention there are also many tax advantages for operating as an LLC as compared to other business structures.
Different Types of Partnerships
There are different types of partnerships that can be formed in business. Some of the most common are as follows:
1. Sole Proprietorship: This is the simplest type of business organization and is owned and operated by one individual. There is no legal distinction between the business and the owner, so the owner is personally liable for all the business debts and obligations.
2. Partnership: A partnership is a business organization owned and operated by two or more individuals. Partners are personally liable for the debts and obligations of the business.
3. Corporation: A corporation is a legal entity separate from its owners. The owners (shareholders) are not personally liable for the debts and obligations of the business.
4. Limited Liability Company (LLC): An LLC is a hybrid business organization that combines the features of a corporation and a partnership. The owners of an LLC are not personally liable for the debts and obligations of the business, but they are still liable for their own personal debts and obligations.
Profit and Loss Distribution for Partnerships and LLCS
When it comes to the distribution of profits and losses among partners in a partnership or members in an LLC, there are a few key things to keep in mind. First, unless otherwise specified in the partnership or LLC agreement, profits and losses are generally allocated in proportion to each partner's or member's ownership interest in the business. So, if you own a 50% stake in a business that makes $10,000 in profits, you would be entitled to $5,000 of those profits. Conversely, if the business suffers a $5,000 loss, you would be responsible for $2,500 of that loss.
There are a few exceptions to this rule, however. For example, if one partner or member contributes more capital to the business than the others, they may be entitled to a larger share of the profits or be protected from more of the losses. Additionally, if one partner or member does significantly more work than the others, they may be entitled to a larger share of the profits or be protected from more of the losses.
Finally, it's important to note that the IRS may get involved in the profit and loss distribution process if the partnership or LLC generates substantial income. You should always consult with a professional business attorney when considering the best structure for your business. Remember, it's better to be working on your business vs in your business.
Can an LLC be a Partnership
Yes, an LLC can be a partnership. In a partnership, the members share in the profits and losses of the business. Partnerships are typically created when two or more people want to start a business together. In a partnership, each partner has an ownership interest in the business, and each partner is responsible for the debts and liabilities of the business.
Partnerships vs LLCs: Which Should You Choose?
There is no one-size-fits-all answer to this question, as the best type of business entity for your company will depend on your specific situation and goals. However, partnerships and LLCs are both common options for small businesses, so let's take a look at the pros and cons of each.
Partnerships are relatively simple to set up, and they offer pass-through taxation, which means that the income and losses of the business are taxed only on the individual partners' tax returns. This can be a tax advantage for businesses that are just starting out. However, partnerships are also less formal than LLCs, and they can be more difficult to manage if the business grows too large.
LLCs offer more legal protections for business owners than partnerships do, and they are also easier to manage as the business grows. However, LLCs are more complex to set up than partnerships, and they are not eligible for pass-through taxation.
About the Author, James Webster
James Webster, founder and Executive Chairman of ROK Financial has almost two decades of experience within the financial services industry. His passion for helping small business owners and his innovative way of thinking, has allowed him to run multiple successful businesses including National Business Capital & Services. Under the National name, the team was able to help secure over $1 Billion in financing for small businesses nationwide.