What’s The Difference between Partnerships and LLCs?
The Difference between Partnerships and LLCs
Partnerships and LLCs (limited liability corporations) are both business structures. There are pros and cons for each type. Likewise, which entity you choose depends on many factors such as:
- The financial status of any co-owners
- The management abilities of the people who will run the business daily
- Any business succession issues
- Inheritance, estate, and income taxes
- Responsibility for debts
Therefore, anyone starting or rethinking a business should speak with a Florida business attorney.
How the business structures differ
Partnerships are not corporations. They are companies with two or more owners. A partnership agreement spells out:
- The terms of ownership
- Who manages the company
- How profits, losses, and draws from the company are allocated
- What happens if a partner wants to sell his/her interest
- What happens if a partner dies or is unable to run the business
There are different types of partnerships:
- General partnership (GP)
- Limited partnership (LP)
- Limited liability partnership (LLP)
The partners can be individuals or other companies.
Limited liability corporations (LLC) are formed according to Florida law. One person can form an LLC. Corporations can have an ownership in an LLC. Unlike standard corporations, the owners of an LLC are members – not shareholders. Additionally, Managers run LLC – not officers and directors.
Liability for debts of the business
In a partnership, the business pays the business debts. Of course, if the business can’t pay the debts, then creditors can seek payment from one or more partners. Thus, the partners who are individually liable can lose their personal assets. This includes homes, bank accounts, and other assets.
All partners are liable in a GP. In an LP, one or more partners named in the partnership agreement are liable. Limited partners can run the business. They are not financially liable for the debts of the business. Therefore, The non-limited partners are personally liable.
Generally, an LLC protects the owners from liability for business debts. The business is liable for debts to creditors. The individual owners may be personally liable if they:
- Personally guarantee the loan or debt obligation.
- Commit fraud
- Mix business assets with personal assets.
Partnerships and LLC taxes
The taxes for partnerships and LLCs are different.
- The partnership is not taxed. The income passes through to the individual owners/partners. Therefore, each partner pays federal taxes on any profits that are passed through and federal taxes on any income. The partnership still files a tax return to show how much profit the partnerships earns and how much each partner gets.
- Limited liability corporations. An LLC files a federal tax return and pays corporate taxes based on any profits. The individual stockholders pay taxes on any taxable income they receive. This includes wages and dividends.
State income tax returns and payments are also due.
Tax issues for partnerships and LLCs (limited liability corporations) are very complex. Furthermore, An experienced Florida tax lawyer can explain the precise differences. Additionally, you should also review the new tax law’s effect on partnerships and LLCs.
Forming a partnership or corporation requires the help of a business formation lawyer. For example, professionals form a Florida professional limited liability company (PLLC). Professionals include doctors, lawyers, and accountants. Some entities must follow SEC regulations.
Get the help your business needs today
At Lulich Attorneys and Consultants, our business and estate lawyers have been advising clients for 30 years. If you are just starting out, we can help you select the right business structure for your company.
If your current business would be better-served by changing its legal status, we can help. To review your business options, please call us at 772-589-5500 (Sebastian) or 772-774-7771 (Vero Beach).