Forming a business partnership does not involve any legal or statutory formalities and can be done any time you wish. However, before you decide on your business structure, consider the risks and benefits of business partnerships or other legal business structures. The common business-for-profit structures are Sole Proprietorship, Partnership, Corporations and Limited Liability Companies. Each structure has its own benefits and risks. Sole Proprietorship and Partnership are easy to form and have high flexibility in management and control. The risks in these structures are that the business owners are personally liable for the business obligations. LLC and Corporations limits business owner’s personal liability but are expensive to form and operate and the legal formalities are comparatively cumbersome.
Partnership being a mutual agreement between two or more owners, is easy to form and does not necessitate any legal formalities. The basic types of partnerships are general partnerships and limited partnerships. General partnerships are more common because it provides all the partners an opportunity to contribute to the business and control the business activities. The downside is that each partner is personally liable for all the business obligations and liabilities. This means that if a claim or liability arises out of the partnership business activity, each individual partner is liable to pay it in full regardless of that partner’s interest in the partnership. If one partner’s personal assets are not enough to meet that partner’s share of the liability, the other partners have to make good for it.
Limited partnerships are also used as a structure for-profit business. Such partnerships has a general partner who is responsible for the overall business operations and limited partners who invest in the business but has no particular say in the business operations. The general partner is personally liable for all the business obligations and debts. The personal liability of the limited partner is limited to a pre agreed amount. These are generally used in family business where family property needs to be protected and the general partner needs freedom to act. A family limited partnership gives flexibility to the dominant family member to operate the business and help protect the family property from business claims and liabilities.
The creation, organization and dissolution of partnerships are governed by the state laws. Partnership is a business association between two or more persons and as the state laws broadly define “business” and “persons’, specific partnership law or acts are not enacted by the State or Federal governments. For state and federal tax purposes, partnership is not a tax classification, the individual partners file the profit or loss from business along with their personal tax returns.
The technical LLC definition is a limited liability company, but many people often refer to it as a limited liability corporation. Referring to an LLC as a limited liability corporation is wrong because corporations are a separate form of business that offers their own types of protection to the shareholders. The LLC definition uses the term company because businesses that are LLCs are not incorporated; they are simply a small business.
A limited liability company differs from a c corporation in many respects. One of the main differences between a LLC and a c corporation is stock certificates. Corporations can issue stock certificates to their shareholders because corporations are owned by shareholders. An LLC is owned by members and not shareholders so they do not have a need for issuing stock certificates. By the LLC definition, a LLC cannot go public like a c corporation can. A c corporation can have private shareholders, but it can also choose to take the corporation public later. If you wish to take an LLC public, you will need to form a corporation once you have decided to go public.
A LLC also differs from a sole proprietorship because it offers certain protections that a sole proprietorship cannot. For example, an LLC member is protected from any business debts or liabilities that are incurred during the course of business, unless a personal guarantee has been signed. If your business is considered a sole proprietorship, you will be personally responsible for any business debts and liabilities that are incurred during the course of business. If you have a sole proprietorship, your personal assets can be seized, such as your car or house, to help settle any business debts and liabilities that your business owes. A business partnership also varies from an LLC in the same manner.
Despite its differences with a c corporation and a business partnership, the best way to describe an LLC is a combination of the two types of business structures. The reason for this is that an LLC combines the advantages of a partnership and a c corporation together. By combining the advantages from each business structure, you get the best of both worlds because your business has the protection that is provided to corporations, but is less formal and more flexible than a corporation is. An LLC does not require you to have any bylaws nor does it require you to have meetings. An LLC does not need to have an operating agreement, which is similar to the bylaws of a corporation; it is still a good idea to have one in place.
Part of the LLC definition is the taxation of the LLC. According to the IRS, the LLC is not a valid business structure; it is not recognized by the IRS for federal tax purposes. If you choose an LLC for your business structure, you will need to classify your LLC as a corporation, partnership, or a sole proprietorship for federal income tax purposes. With an LLC, you are receiving a tax advantage because you are choosing how your business is going to be taxed, unless your LLC is automatically classified as a corporation under the IRS guidelines. Most LLCs choose to be taxed as a business partnership or a sole proprietorship because that allows for pass-through taxation and allows you to avoid the double taxation faced by corporations, unless you classify your LLC as an S corporation.
