Partnerships and limited liability companies present several similarities for business owners looking for the right company structure. Both have similar income distribution and tax-reporting formats, and both are simpler to set up and operate than a corporation.
All owners may have unlimited personal liability with a partnership, but establishing a business as a limited partnership leaves most owners insulated from such risks. Within a limited partnership structure, only one general partner assumes unlimited liability. All inactive, limited partners have limited liability, just as they do with an LLC.
General partnerships and LLCs both allow for multiple active owners or members, whereas a limited partnership has one active general partner and one or more inactive limited partners.
Income Distribution and Tax Reporting
The income distribution and tax reporting for owners are similar with partnerships and LLCs. In both setups, profit normally is shared evenly among the owners unless agreed upon differently in writing. For certain partnerships, partners may agree to invest different amounts of resources, and therefore profit unequally.
Income is treated as pass-through for both business types in tax reporting as well. Pass-through income means the company isn't taxed on profits before they are distributed to owners. In a corporation, the business pays taxes and then the remaining income is shared with owners, who then pay taxes. Avoiding the double-taxation allows owners to pocket more of the company's income.
LLCs are a bit more complex to form than a general partnership, but both are less complicated than setting up a corporation, according to the legal website Nolo. General partnerships are sometimes as simple as pooling resources, getting a building when necessary, and actively engaging in business operations. Some states require more formal paperwork for certain types of partnerships. LLCs require formal registration within the state of operation, but the documentation and time involved are still modest compared to the articles of incorporation and other requirements to form a corporation.