Establishing a business requires a lot of planning and legal expertise so that the business will run smoothly and the partners involved in running the business will be properly protected and compensated. If you are considering starting a small business and are not sure which type of business is best for you regarding taxes profits loss and liability here is a description of a Limited Liability Company (LLC) and a Limited Partnership (LP) and some of the advantages for choosing each one.
A partnership is formed when two or more people come together and establish a business. The simplest way to establish a partnership is through a general partnership because it requires the least amount of formalities. The disadvantage to forming a general partnership is that a general partner can end up in legal trouble as a result of this business structure. Certain Legal troubles can be minimized by business partners when a limited partnership or limited liability company is formed.
What is a Limited Partnership?
The ownership of a limited partnership is made up of at least one general partner and one limited partner. In this type of setup the general partner holds unlimited liability while the limited partner holds limited liability. With a general partnership all partners are subject to personal liability. That means that each general partner can be sued for the debts or the wrongs of the business. When this happens in order to cover the lawsuit or business debt a general partner can end up losing a significant amount of personal assets. A partner can protect himself from personal liability by creating a limited partnership.
What is a Limited Liability Company?
For a limited partnership to be formed the law requires at least two owners while an LLC can have just one owner. Owners of an LLC are called members instead of partners. Similar to the limited partnership the owners of the LLC have limited liability and therefore only bear liability for the debts of the business up to the value of their investment in the business. The difference is unlike a limited partnership LLC owners do not bear unlimited liability for the debts of the business therefore the owners of an LLC do not stand to lose their personal assets to cover business debts assuming the member did not personally guarantee the business debt.
Advantages of an LP over an LLC
For an entrepreneur who is looking to gain investors while retaining managerial control this set up is ideal. Here are a few other advantages to organizing your business as an LP:
- Low cost of operation
- Lower filing fees
- They begin the moment the partners begin doing business
- Fewer ongoing operational requirements
- Quick to dissolve
- Ideal for short-term projects
- Death withdrawal or bankruptcy of the general partner ends the partnership
Advantages of an LLC over an LP
Legal Organization for most businesses begins in order to protect your assets from creditors and minimize taxes. There are several other advantages of choosing an LLC for your business over an LP status. Here are a few:
- Protected assets. Creditors cannot pursue the personal assets of the owners to pay business debts.
- Pass-through taxation. Taxes are not paid at the business level but “passed-through” to owners and reported on personal income tax returns.
- Heightened credibility. Forming an LLC is seen as a formal commitment to your business and can help new businesses establish credibility.
- Limited compliance requirements. An LLC will face fewer state-imposed annual requirements and ongoing formalities
- Flexible management structure. Organizational structure is open and decided on by company owners.
- Fewer restrictions. There are fewer restrictions on who can be an LLC owner or how many owners an LLC may have.
Laws vary greatly depending on where the LLC or LP was formed and where it conducts the majority of its business. When choosing whether you want to organize your business as an LLC or LP take time to assess the importance of having effective control over your business and how the legal and tax requirements will affect you. When making a decision consult the professionals at Lindemeyer. We will walk you through the process and help you make the decision that will best benefit your business.
Remember that laws vary greatly depending on where the LLC or LP was formed and where it conducts the majority of its business. As you gather information on legal and tax requirements you must also take time to assess how important it is for you to have effective control over your business. Would you rather trust experts or trust your gut instincts? It has helped other business owners to convert value judgment decisions like these into dollar values. How much is responsibility and control worth to you?