Comparison of a Limited Liability Company and a Partnership

LLCs and partnerships have both similarities and differences.

Partnerships and limited liability companies ("LLCs") are similar in that both partners and LLC members create agreements which then govern almost all aspects of business operation. However, the businesses differ in terms of how the government taxes them, and the extent to which the members of the business may be held liable for its obligations. People with specific questions about different types of businesses should consult a business law attorney.

Creation

Creation of LLCs and partnerships typically occurs in a similar manner. A group of people who wish to form and operate a business come to an agreement (known as a membership agreement for LLCs, or a partnership agreement for partnerships.) This agreement ideally spells out every detail of how the business will operate: termination, management, split of profits and losses, etc. Both LLCs and partnerships must register their businesses with the Secretary of State's office of the state in which the business will operate before commencing business.

Governing Law

Membership and partnership agreements generally dictate the operation of the LLC and partnership. Should the agreement fail to cover the consequences of any event that may occur, applicable state law then governs. Each U.S. jurisdiction has a well-defined body of partnership law. LLCs, however, have appeared relatively recently. States have begun to develop LLC-specific laws, but in many states, courts often use partnership law as a gap-filler.

Liability

Should the partnership incur liability, such as debt or legal judgments, each partner is personally liable for the entirety of the obligation, meaning that her personal assets can be used to satisfy the partnership's liabilities. If any partner must pay more than his share, he does have the right to seek a proportional contribution from the other partners. An LLC, by contrast, provides corporation-style protection from personal liability. The LLC members have no personal liability for business obligations beyond the amount they've actually contributed to the business.

Transfer of Membership

LLC membership agreements govern whether the LLC members can transfer their interest in the business, whether such a transfer requires the consent of the other members, and how any transfer may change the structure of the business. In most states, by contrast, a partner's notice of intent to withdraw from the partnership triggers dissolution and then liquidation of the partnership. Partners will usually remain liable for partnership actions taken during their time in the partnership.

Taxes

Partnerships and LLCs take similar tax treatments. Unlike corporations, in which both the business itself and its members pay taxes on the profits, partnerships and LLCs do not need to pay taxes as business entities. The partners, and the LLC members, pay individual taxes on their shares of the profits only.

References

• "Corporations, Other Limited Liability Entities and Partnerships"; Thomas Lee Hazen and Jerry W. Markham; 2008
• Nolo: LLC Basics
• Nolo: Partnership Basics

Resources

• IRS: Business Structures