What kind of legal structure to choose is one of the most crucial decisions you’ll make when launching a new firm. The limited liability company (LLC) and the partnership are two common choices for small businesses. Each has advantages and cons of its own, and the ideal option for your company depends on a number of variables.
Let’s first define each of these structures. A partnership is a company that has two or more owners who split the gains and losses. On the other hand, an LLC is a type of business form that combines the tax advantages of a partnership with the liability protection of a corporation.
A partnership has the benefit of being simple and affordable to establish. There is no need to file with the state and no official paperwork is necessary. A benefit if one partner contributes more than the others is that earnings and losses are divided among the partners in accordance with their ownership percentages.
However, there are also substantial drawbacks to partnerships. Partners’ personal assets may be at stake because they are personally liable for the business’s debts and legal responsibilities. Additionally, because partnerships can only add new members, their capacity to raise cash is constrained.
LLCs have a number of benefits over partnerships. The fact that the owners are not held personally accountable for the company’s debts and legal commitments is one of the most important. This means that in the event of litigation or bankruptcy, their private assets are safeguarded. Furthermore, LLCs can have an infinite number of members, which facilitates capital raising.
However, using an LLC has significant drawbacks as well. One of them is that it might cost more to establish and maintain than a partnership. LLCs must also pay self-employment taxes, which may be more expensive than the taxes paid by partnerships.
Which is better for your company, then? It actually relies on the demands and situations that are unique to you. A partnership can be the best option if you’re launching a small firm with one or two partners and don’t expect to need to raise much money. An LLC might be a preferable option, though, if you’re launching a bigger firm or want the added liability protection.
In terms of ownership, partnerships are normally restricted to a certain number of partners but LLCs can have an unlimited number of members. You must choose the share of an LLC that each member will possess before structuring ownership. This may depend on the capital each member invests in the company, among other things.
In conclusion, it is unclear which structure is preferable for your company—a partnership or an LLC. The ideal option for your needs and circumstances will rely on each option’s pros and downsides. Before making a choice, it’s crucial to thoroughly weigh all of your options and get advice from a legal or financial expert.