In the run-up to opening a small business, many people believe that there is little difference between a partnership and an LLC. The truth is that the two types of entities share many characteristics, including the fact that they have to be registered with the state; the fact that both are pass-through taxing entities; the fact that both distribute profits and losses directly to their owners; and that both should have some kind of an operating document. But there is one highly significant difference between the two, and that has to do with liability.
Liability refers to whether or not somebody can be held legally responsible for the partnership’s debts and responsibilities, and partnerships and LLCs have a very different treatment of its partners or members.
- When a partnership is formed, each partner assumes personal responsibility for any debts of the partnership itself. This responsibility goes beyond the debts and obligations of the partnership itself and extends to liability for the actions and debts of the other partners in the group.
- When a limited liability corporation, or LLC, is formed, the people who make up the principals of the corporation are known as members, and the corporate structure protects its members from liability for the debts of the organization. There are some exceptions to this rule, and they include:
- Where the LLC operates without a clear separation between the business organization and its individual members
- Where one or more of the LLC’s members personally guarantee a loan for the organization, such as signing a personal guarantee for a mortgage for the organization
- Where one or more of the members is involved in illegal activities or fraudulent activities that exceed their duties
- Where one or more of the members mismanages the organization’s affairs
One other consideration is that when you form an LLC, members are considered self-employed, and therefore must pay self-employment tax towards Medicare and Social Security.
In choosing which of these structures is best for your business, you need to keep more than your personal assets in mind. You also want to consider the amount of paperwork that needs to be filed, how you want to be taxed.
To determine which is the best option for your small business, we are here to provide you with the legal guidance you need. Contact us today to set up an appointment.