What to Consider When Deciding Between a Partnership and an LLC
There are many factors that can affect your choice of business entity. Here are just a few of the many important things to consider:
Taxation
Partnerships are not taxed as a separate entity. Rather, the profits and losses “pass through” to the partners, who report them on their individual tax returns. This system is beneficial in avoiding much higher corporate tax rates. LLCs, on the other hand, can elect to either be taxed as a business or use pass through taxation to the individual members. There are certain circumstances in which a business may benefit from being taxed as a corporation. It is important to consult with tax professionals to be sure you are electing the tax structure that is best for your business.
Personal Liability
An LLC is designed to protect its members from being personally liable for the debts of the business. Absent dramatic circumstances (such as fraud), the members will not be on the hook for legal or financial liability the business incurs. A partnership, on the other hand, does require some personal liability on the part of its owners. A general partnership is made up of general partners – all of whom directly manage the business and are therefore personally liable for the debts of the business. A limited partnership is made up of at least one general partner and one or more limited partners. The general partner manages the business and is personally liable for all liabilities of the business. The limited partners do not participate in the management of the business. Because of this, their liability is usually limited to their initial investment.
Corporate owners
In a partnership, each partner must be an individual. Corporations cannot be members of a partnership. They can, however, be members of an LLC. The partnership entity is, therefore, unavailable for businesses in which a corporation is to be a member.
Call Us Today to Discuss Your Plans with an Experienced California Business Lawyer
As you can see, the election of a business entity has many implications that can affect your new business for years to come. It is important to get good legal advice from the start. This can save you significant time and expenses well into the future. The experienced corporate attorneys at Structure Law Group have helped many California entrepreneurs form businesses that are protected from liability, and we can help you, too. Call (408) 441-7500 or contact us online to schedule your consultation today.