When choosing an LLC or partnership for the form of your business, numerous considerations come into play, including personal liability, ownership and management, cost of forming and registering the business, and taxation. One of the more popular forms of business organization is the limited liability company. However, before deciding to form an LLC, you should compare it with the various business partnership options.
LLC vs. Partnership – Preliminary Consideration
In order to form a partnership of any type, you need more than one person. Therefore, if you will be the only owner of the business, you would have to use the LLC.
There are several significantly different types of business forms that contain the word “partnership.” The following is a brief description of each:
General partnership (often simply called a partnership). Two or more people own and operate a business, as joint owners. Each partner has equal rights to operate the business. Each partner has personal liability for the obligations of the business, just as if operating as a sole proprietor.
Limited partnership (LP). Two or more people own a business, but there are two classes of partners: general partners (who own and operate the business, and have personal liability), and limited partners (who invest their money or property in the business, but do not have the right to make decisions regarding operation of the business, and do not have personal liability for business debts).
Limited liability partnership (LLP). This is basically a general partnership, but with the addition of giving the partners at least some limited personal liability.
Limited liability limited partnership (LLLP). This is basically a limited partnership, but with the addition of giving the general partners limited personal liability. Like a regular LP, there are two classes of partners: general partners and limited partners, both of whom have limited personal liability.
What Is an LLC?
A limited liability company (LLC) is more similar to a corporation than to any type of partnership. An LLC can be formed with as few as one owner, so, rather than operate as a sole proprietor, you can form an LLC to limit your personal liability. In comparison to a corporation, an LLC has members instead of shareholders, and managers instead of directors and officers.
Partnership vs. LLC
Regarding liability, an LLC is always better than a general partnership. You and your partners can form an LLC and limit your personal liability. However, there will be additional costs in setting up and registering an LLC.
Limited Partnership vs. LLC
An LLC is usually more advantageous than an LP, since the LLC provides personal liability protection for all owners. However, between filing fees and legal fees for more paperwork, an LLC may be more expensive to form than an LP. Also, all members of an LLC have at least some say in how the business is managed, whereas limited partners in an LP have no say in how the business is managed. If, for some reason, an LP would have advantages, you can still form an LLC to serve as the general partner and thereby limit personal liability.
You may want to choose an LP over an LLC if one or more of the following are true:
- You don’t want the investor-owners to have any say in how the business is run.
- You are comfortable with having personal liability.
- You would save money by organizing as an LP.
Limited Liability Partnership vs. LLC
Although the partners in a limited liability partnership have limited personal liability, an LLC may provide more comprehensive protection. However, not all states permit LLPs. Also, some states only allow people engaged in certain professions to form an LLP (typically lawyers, accountants, architects and engineers), and prohibit them from forming an LLC. Some states call it a professional limited liability partnership (PLLP) or a registered limited liability partnership (RLLP).
Limited Liability Limited Partnership vs. LLC
LLLPs are currently available in Alabama, Arizona, Arkansas, Colorado, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Iowa, Kentucky, Maryland, Minnesota, Missouri, Montana, Nevada, North Carolina, North Dakota, Oklahoma, Pennsylvania, South Dakota, Texas, Virginia, Washington and Wyoming. California does not allow formation of an LLLP, but recognizes LLLPs formed in other states (for an $800 annual registration fee).
LLCs and LLLPs provide the same personal liability protection. You may want to choose an LLLP over an LLC if one or more of the following are true:
- You don’t want investor-owners to have any say in how the business is run.
- You don’t plan to operate in a state that does not recognize LLLPs.
- You would save money by organizing as an LLLP.
Other Differences to Consider
Before choosing a particular form for your business, you need to become familiar with your state’s business entity laws. Information may be obtained from your state’s agency that regulates businesses (frequently a division of the Secretary of State).
Registration fees. Most business entities (except a sole proprietorship and a general partnership) require some type of registration with the state. However, any business may need to register a business name (other than your own name or those of you and your partners), called an assumed name or a fictitious name. Filing fees can vary greatly, depending upon both the state and the type of business entity.
Paperwork requirements. The type and extent of records required for both registration and taxation can vary depending upon the type of entity.
Securities regulations. Limited partnership interests are securities, like shares of stock. If you have no more than 10 limited partners (35 in some states), all of whom are known to you and live in your state, you will generally not be subject to securities laws.
Taxation. Although LLCs and partnerships can provide for profits to be passed through and taxed to the owners, the type of entity you choose may still affect taxation. A properly qualified tax advisor should be consulted.
For the most comprehensive personal liability protection, an LLC is usually preferable. However, there are many factors to consider in determining whether to set up your business as a partnership or LLC.
If you're ready to form an LLC, limited partnership or limited liability partnership, LegalZoom can help. Start by answering a few simple questions. We assemble your LLC or partnership documents, file them with the Secretary of State, and send your complete LLC or partnership package by mail.