Let’s take a quick look at each a partnership and an LLC.
A legal partnership is formed through a partnership agreement between two or more principal parties. What sets a partnership apart from other legal entities is profit distribution, tax obligations and liability exposure. Initial capitalization is is achieved by capital contributions made by each partner pursuant to the terms of the partnership agreement. These partners share the burden of liability exposure on behalf of the partnership directly related to the percentage of their capital contribution as calculated against the the total. In other words, (put simply) your percentage of contribution and ownership determines your profit distribution and personally responsibility if the partnership is found liable for damages. There is no corporate veil protection for partnerships. Each partner may be sued individually or collectively for the actions of the partnership.
Though it bears similarities to both a “C” Corporation and a legal partnership, a limited liability company (“LLC”) is neither a corporation nor a partnership. Therefore, the owners of an LLC are not a shareholder or a partner. Rather, they are called members. Nevertheless, you can find in an LLC the combination of the best characteristics of a corporation and a partnership. An LLC’s member can be any person, partnership, other LLCs, corporations or other foreign entities.
Just like a corporation, and unlike an LLC, a limited liability company offers its owners protection from any personal liability from the business debts. What makes it better is that it is a pass-through entity with regard to tax, something a corporation is not. Being a pass-through entity means it can pass through to its owners the company’s profits as well as losses. They will then reflect these on their personal tax returns just as it is done in a partnership or a sole proprietorship. Just like with partnerships, LLCs provide greater flexibility for the company’s management.
Also, in an LLC you can allocate the way you want the profits to be distributed and it does not have to be based upon the percentage of ownership. Here is an example: There are two members in an LLC that own it 50/50. But one member is an investor only, who wants to protect their investment by controlling 50% of the company. But the other member is the one doing all the work and who wants more than 50% of the profit. Just write in the agreement that the working member gets 75% of the profits, even though they only own 50% of the business.
Now we can see why a partnership and an LLC are completely different and separate legal entities. If you’d like more information about LLCs, contact us at. We’re a legal marketplace for people to connect with high quality attorneys. We’ve helped 1000s of entrepreneurs with their legal needs by offering things like flat-fee pricing, free initial consultations, and 24/7 customer support.