A limited liability company (LLC) is not a partnership. There are many similarities between an LLC and a limited partnership, such as pass-through tax treatment and flexibility in the rights and duties of members. But, these entities also have many differences. This may make deciding between these two business structures seem a bit difficult.
What is the Difference Between a Partnership and an LLC?
To decide if a partnership or LLC is the best fit for your business, here are the key similarities and differences between them.
What is an LLC?
An LLC is a business structure treated as a separate entity from its owners (also called members). Like partnerships, the Internal Revenue Service (IRS) taxes LLCs as pass-through entities with all members reporting their profits on their personal tax returns. LLCs also offer limited liability protection to all members. An LLC may be formed by a single person or multiple members.
What is a Partnership?
Partnerships are formed when two or more individuals agree to be co-owners of a business. There’s no legal distinction between the owners of a partnership and their business. Partnerships are considered pass-through entities, with owners reporting all business earnings and losses on their personal tax returns.
Partnership vs. LLC: Formation
A partnership is created when two people decide to form a business together. The partners aren’t required to file any paperwork with — or obtain any documents from — the local government in order to start conducting business.
In some states, you’re required to present a certificate or an official document to provide proof of your partnership. However, you and your partner(s) do need to register a trading name.
An LLC, however, must obtain a certificate of formation with the state where the business is organized. Additionally, this type of business entity must be registered with each state in which it conducts business.
To form an LLC, you must file Articles of Organization. Once you start your business, most states require regular record-keeping and reporting to keep an LLC in good standing.
Check out StateRequirement’s guide on How to Start an LLC.
Partnership vs. LLC: Taxation
The IRS considers both partnerships and LLCs as pass-through entities. Owners of both businesses must report their profits on their personal tax returns. They’re also both responsible for paying self-employment taxes.
Unlike partnerships, LLCs also have the option to elect corporate status for tax purposes. This enables LLCs to be taxed as either S or C corporations if this designation is more favorable.
Partnership vs. LLC: Ownership
LLCs can have a single member or multiple members. A partnership, however, can be initiated only if there are at least two members.
Also, an LLC can have other partnerships, corporations, or another LLC as part of its operations. Foreign individuals and businesses can be owners of an LLC. In contrast, other businesses can’t act as partners in a partnership.
Partnership vs. LLC: Liability
As its name applies, a limited liability company offers limited liability protection against legal actions and business debts. With this protection, the personal possessions of the owners can’t be used to pay for any of the business’s debts. Each owner is only liable for business debts equivalent to what they invested in the company.
A partnership, on the other hand, means the owners are each fiscally responsible for business debts and can be held accountable for all business discretions. This means the owners can be held personally accountable — and their personal assets used — to cover any business debts, lawsuits, and legal fees.
How to Convert a Partnership to an LLC
To change your partnership status to an LLC, you’ll need to file a document called the Articles of Organization. Here are the steps for transforming an existing partnership to an LLC:
Fill out the Articles of Organization form (some states call this a Certificate of Formation or Certificate of Organization) from your state agency’s website. The state agency is responsible for the registration of business organizations.
For this, you’ll need to provide the following information:
- Your LLC’s name and address
- Your LLC’s designated registered agent (who’ll receive service of process in case your LLC is ever sued)
- Indicate if the management of your LLC will be handled by people with or without an ownership stake in the LLC
- Your signature and the date
File the Articles of Organization. Some states enable you to file this formation document online. The filing fee varies, depending on the state, but usually falls within the range of $50 to $350.
Transfer your existing business assets to your new LLC. You can do this by drafting a bill of sale.
Close down the partnership business. If the partnership is registered with a state agency responsible for business registration, you’ll need to file a Certificate of Cancellation.
Partnership vs LLC FAQ
Should I register as an LLC or partnership?
It depends on your business needs. An LLC offers better liability protection and more tax flexibility than a partnership, though. Read more in this Partnership vs. LLC article.
Can a partnership also be an LLC?
Yes. Owners are prone to liability as a partner, so they may choose to form an LLC and conduct their partnership business as an LLC. The LLC takes the full liability of the business, but shields the owners from personal liability.
Is an LLC taxed as a partnership?
Yes. An LLC is taxed as a partnership. This is because the IRS doesn’t recognize an LLC as a taxable entity, but as a pass-through entity. Hence, a multi-member LLC would be taxed in the same way as a partnership. Check out StateRequriement’s guide on LLC Taxes for more information.
How is an LLC similar to a partnership?
An LLC is quite similar to a partnership in various aspects, such as how it must report business operations to the state and its profit and loss distribution. Whether you’re forming an LLC or partnership business, you’re required to report periodically to your state. Also, the division of loss and profit is the same for both partnerships and multi-member LLCs. Unless your partners agree on some other arrangement, partners and LLC members have an equal share in the business’s profits.