Ready to get started on your business plan? If so, you might be wondering what type of entity you should form. Should it be a partnership or an LLC? Which is the best for your business’s needs and goals?
Making sure you’re in the right business structure can be confusing. The legal structure of your business is an important decision that will affect how it grows, operates, and deals with risks.
This blog post examines two of the most common types of business structures: partnerships and LLCs. It explains what they are, who should use them, what their advantages are, and disadvantages. Hopefully, after reading this post you’ll understand which one is right for your needs!
What is a Partnership?
A Partnership is a business owned by more than one person. The owners are called partners and each partner has an equal voice in the management of the company, regardless of their contribution to start-up costs or ongoing work.
Each partner contributes money, property , labor or skills to the partnership . In exchange for this contribution they receive a percentage of the Partnership’s profit (revenue minus expenses).
Partnerships can be simple or complex. Some partners may contribute cash in exchange for a percentage of profits, while others might bring in valuable property like real estate to be used by the Partnership in their business operations. The Partnership Agreement should spell out each partner’s rights and responsibilities within this arrangement.
What is an LLC?
An LLC or Limited Liability Company is a type of business structure for private companies in the US. It combines the tax benefits of a Partnership or Sole Proprietorship with the liability protection granted to shareholders in Corporations.
The owners of an LLC are called “members” instead of partners. The owners are not personally responsible for the company’s debts and obligations beyond their investment in the LLC itself.
It’s also sometimes called an “S-corporation.” An LLC has one or more members who are granted limited liability protection, which means their personal assets cannot be used to repay business debts or claims against the company.
The LLC is often a more attractive option for companies with several co-owners, since it offers the Partnership’s tax benefits and none of the Partnership’s restrictions.
LLC Vs Partnership – Liability
Partnerships and LLCs both offer liability protection to their members, but in different ways.
In partnership, the partners are jointly and severally liable for the Partnership’s actions. This means that each partner is responsible not only for their own actions, but also for their partners.
For example, if a Partnership must pay a $35,000 fine due to illegal dumping by one of the partners, all of the other partners will be responsible for paying that fine. Partnership members are responsible for one another’s actions, and can be sued as a group or separately depending on the circumstances of the lawsuit. Due to this reasons, individuals who wish to form a partnership should be extremely selective when choosing partners.
In an LLC, members are not generally liable for the actions of other members. Each member is only responsible for their own acts or omissions.
For example, if a member invests $40,000 into an LLC and then the LLC incurs $200,000 in debt that it is unable to pay, then creditors can only make a claim against that member’s initial investment of $40,000. They are not able to touch the member’s personal assets beyond that initial investment.
LLC Vs Partnership – Profit-Sharing
Partnerships and LLCs both take their income as Partnership Profit, which is the revenue made by a business after expenses.
In an Partnership, each partner is entitled to a percentage of Partnership Profit in accordance with the Partnership Agreement. This means that if one partner invested more money into the Partnership, they would be entitled to a larger share of profit than their partners.
In an LLC, members take their income from profits in proportion to their percentage of ownership. For example, if one member has a 20% stake in the LLC and another has an 80% stake, then the first partner will be entitled to 20% of LLC profits and the second partner will be entitled to 80%.
LLC Vs Partnership – Management Structure
Partnerships have more flexibility in terms of how they are managed, but LLCs offer a bit more protection for members who wish to remain independent from each other.
In an Partnership, all partners have equal authority within the Partnership and majority vote rules all decisions. For example, if there are three partners in a Partnership and two of them wish to dissolve the Partnership but one does not, then it is up to the majority (two) on whether or not the Partnership dissolves.
With an LLC however each member has more authority within their own sphere of influence than Partnership members. For example, if two LLC members are in disagreement with one another, the member who owns more of the Partnership has greater authority to make decisions on behalf of that Partnership than their partner.
LLC Vs Partnership – Taxation
Partnerships and LLCs both have pass-through taxation which means that they do not pay taxes at the Partnership or LLC level. Instead, Partnership and LLC profits are passed through to their members who pay taxes on the money they have made from the Partnership/LLC as personal income tax.
In an Partnership, each partner is taxed individually for all Partnership Profit that has been allocated to them in accordance with the Partnership Agreement. In other words, if Partner A makes $100 Partnership Profit, they will pay taxes on that money as personal income tax.
In an LLC however, all members are taxed individually for their respective percentage of Partnership profit (distributions). That is, they are tasked according to how many percent of the business they own. For example, if member A owns 50% and member B owns 50%, then each member is taxed on 50% of Partnership Profit.
Similarities Between an LLC and a Partnership
Both Partnership and LLCs have Partnership Profit, which is the revenue made by a business after expenses.
Each Partnership/LLC member takes their income from Partnership Profit as distributions according to percentage of ownership.
Both Partnership and LLCs have pass-through taxation, meaning they do not pay taxes at the Partnership or LLC level. All members are taxed individually for their respective percentage of Partnership profit (distributions).
Differences Between an LLC and a Partnership
Partnership management is more flexible than the Management Structure in an LLC, which offers a bit more protection for independent members.
Each Partnership member is taxed individually for all Partnership Profit that has been allocated to them. LLC members are taxed individually according to how many percent of the business they own.
In an Partnership, all partners have equal authority within the Partnership and majority vote rules all decisions. In an LLC however each member has more authority within their own sphere of influence than Partnership members.
Partnership vs LLC: Which One Is Right For You?
So which one is right for you? Partnership or LLC? Well, it really depends on what your goals are.
Partnership is a more general form of doing business, which means that if you are not sure what your company will be doing in the future, then you might want to go with a partnership. This is because it can always change into an LLC if necessary.
However, an LLC is a more specific form of doing business, which means that it can ONLY be used for the intended purpose. In other words, you cannot use an LLC if your company is going to be doing something different than what you intended it for in the future.
Therefore, an LLC is better if you want to make sure that your company will only be doing what it was intended for. However, a partnership is better if you are not sure what your company will be doing in the future.
Some major factors to consider when deciding between a partnership or LLC include how much liability protection each offers, taxation implications, required filing fees/annual reports, and whether it’s more appropriate for small businesses or large ones.
Partnership and LLC are two different business structures that should be considered by start-ups or small businesses. Partnership is a business organization where several people come together to form one firm with the same interest, whereas LLC is a legal entity formed under state laws for conducting business.
Most of the members in a Partnership have equal authority within their business, whereas with an LLC each member has control over his/her own sphere. An LLC offers limited liability protection, whereas a Partnership offers unlimited liability.
The taxation for an LLC is different from that of a partnership and members are taxed individually for their distributions from the Partnership Profit/LLC Revenue.
In conclusion, choosing the best business structure for your Real Estate company can be a daunting task. There are many things to consider, such as how much capital you want or need and whether there is risk involved in the project. One of these choices that should not get overlooked is what type of ownership entity will work best for you? Partnerships offer limitless liability protection but no limited liability; LLCs provide some limited liability protection but with unlimited personal responsibility. This blog post has offered insight into two different types of business structures and their differences so that you can make an informed decision on which one would meet your needs better. The bottom line is this: take time before making any decisions about partnerships vs. LLCs for real estate startups because it could save you a lot of headaches down the road.
Partnership and LLC offer different advantages, so you should consult with our team of experts at Xotic Properties before making the final decision. We’ve been in this industry since 1988, which is why we have such an expansive knowledge base on these topics. In addition to having extensive experience working with partnership structures, we also know how best to utilize LLCs as well! When you choose us as your partner or legal counsel, you can rest assured that every aspect of starting up will be handled – from forming partnerships or setting up an LLC through strategic marketing plans and more! Get in touch today if there’s anything else we can help you with.
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