How does an LLC differ from a partnership?

While both a partnership and a limited liability corporation (LLC) can involve more than one person working together on business ventures, the two have vastly different setups and legal structures as operating entities. Technically a partnership isn’t even incorporated, while an LLC is. There are two simple, primary ways to define the differences between a partnership and an LLC: by liability, and by the formation process.

Partnership vs. LLC Liability

In an LLC, a legal entity is formed to limit the legal and financial liability of corporation owners, protecting the personal assets of the owners. In a partnership, however, individual liability is passed on to the partners involved in the business, with shared profits and losses between all partners. A personal partnership usually involves all parties engaged in the partnership agreeing on liability. Both partnerships and LLCs use pass-through taxation, which limits or completely eliminates taxes at the corporate level.

Partnership vs. LLC Formation

While an LLC must be filed and incorporated, a partnership is far more simple. Simply by doing business together, two entities can be considered a partnership with few requirements other than a partnership EIN. The members of a partnership can be individuals or can extend to other legal entities such as trusts, corporations, and estates. Most partnerships establish partnership agreements to create clear expectations regarding profits, expenses, dispute management, and responsibilities. Although partnerships have far fewer legal requirements, many times those involved in partner agreements choose to sign legally binding documents to ensure fair handling of any issues or disagreements.

Setting Up a Business Partnership

Even with the minimal requirements for business partnership setup, it can be confusing determining who is liable and whether or not starting an LLC might be wiser. For guidance, our forms and wizards can provide an easy walk through that helps you make the right decisions regarding your business partnership and corporate setup.