Your Business: LLC vs. Partnership

For many small-business startups, a limited liability
company provides a blend of features found in
partnerships and corporations. The corporate-like
features make an LLC preferable to partnerships for
many small companies.

by Jeffrey Moses

The following comparisons between features of LLCs and
partnerships can show which would be preferable for a
new company:

1. The chief benefit of LLCs in comparison to
partnerships is that LLCs, like corporations, are
recognized as separate legal entities, meaning
individual members of an LLC are shielded from debts,
obligations and liabilities of the company. The extent
of liability is limited to the amount that a member has
invested in the company. There are exceptions, such as
when an individual member personally guarantees debts
or liabilities incurred by the LLC, or when the LLC is
considered by a court as an "alter ego" of the owner or
owners.

In contrast, individual partners of general and limited
partnerships may be held fully liable (jointly and
severally) for all debts, obligations and liabilities
of the partnership. Some limitations may apply, of
course, but most partnerships cannot provide separate
legal status for partners. Consult with your attorney
or business adviser for information in these regards.

There is little reason that an individual or
individuals starting a new company should choose to
establish the entity as a partnership. Why expose
personal assets to potential company debts and
obligations when an LLC can provide asset protection?

2. LLCs and partnerships are generally treated
similarly for tax purposes, both locally and federally.

3. Owners of LLCs may be able to reduce their taxable
income by up to 25 percent of their medical insurance
costs.

4. LLCs are much easier and less expensive to set up
than corporations. In fact, most states allow you to
establish an LLC by filing an Articles of Organization
with the secretary of state. It is wise, however, to
consult with an attorney when establishing any type of
business entity for liability, tax and other purposes.

5. Slightly more paperwork is required for an LLC than
for a partnership, but much less than for a
corporation.

6. All states except Massachusetts allow an LLC to be
established and exist with a single member.
(Massachusetts requires at least two members.)

7. LLCs do not require regular corporate meetings with
minutes, as do corporations.

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