LLC as a Partnership: What to Know Before You File

Getting a new Limited Liability Company (LLC) off the ground is quite a challenge. At some point, you may even wish you had a partner to share the workload, lend some support, and identify effective solutions to your most demanding problems. However, finding a reliable partner is another challenge in and of itself.

Let’s hit the basics so you understand whether forming an LLC partnership is a good idea for your unique needs.

What Is an LLC Partnership?

An LLC partnership refers to two separate types of businesses: an LLC, which is a business entity consisting of one or more members, and a partnership, which occurs when you start a business with another person but don't set up a legal entity.

Is an LLC With Two Owners the Same as a Partnership?

While an LLC with two owners is similar to a partnership, it's not the exact same thing. 

An LLC can consist of one or more members and has a certain set of rules and regulations that must be followed to achieve official business entity status. That status also comes with benefits such as liability protection.

If you started an LLC on your own but want to add a partner later, you can do that too.

Partnerships, however, are automatically formed when two or more people start a business together. Because it's not a legal entity, there is no liability protection for those involved (but you have options if you want protection and don't want to file an LLC — more on this later).

Differences Between LLCs and Partnerships

As mentioned above, the main difference between an LLC and a partnership is the level of liability. Unlike an LLC, a partnership is not a formal legal entity, meaning your personal assets would be on the line if your business faced litigation.

In addition, LLCs and partnerships differ in terms of taxes. Single-owner LLCs will be taxed as sole proprietors and must file a Schedule C form in addition to their traditional tax returns. LLCs also have the opportunity to be taxed as an S Corp to avoid double taxation, and partnerships do not. 

Other Partnership Options

If you feel that a partnership may be a better fit for your needs than an LLC, know that you have a few options that will offer you and your partner a bit more protection.

Limited Liability Partnership

A limited liability partnership, or LLP, is similar to an LLC in that you receive an official separation of your personal and professional assets. But unlike an LLC, an LLP can only consist of two people, and the management duties of your business will be split equally between each partner.

LLPs aren't available in all states, so make sure you do your research before trying to file.

Limited Partnership

A limited partnership describes a business with one or more partners that retain full liability for the business and other partner(s) who do not hold any liability within the company. These limited partners generally contribute funds to the business but do not have a say in the day-to-day decisions.

Benefits of Forming an LLC

Because they are based on state law, LLCs are much easier to create than most other kinds of business entities. Not only do they lend themselves to a flexible management structure, but they also provide legal protections for each legal owner (or member) of the company, safeguarding them from the liabilities and debts of the company itself.

In this way, many professionals see starting an LLC with a partner as the ideal structure for their partnership needs. Think of it as the best of both worlds. As in a partnership, you still retain the ability to shift your management style and profit distribution, but with the added benefits of almost universal personal liability protection.

What Is a Member-Managed LLC?

If you want to file for an LLC and are aiming for every member to have a hand in how your company is managed and operated, this is known as a member-managed structure. All members receive a portion of the profits and have a voice in deciding the company’s direction. Unless specified otherwise in your operating agreement, this is the default structure of your LLC.

So, if you will have members who shouldn’t have ownership stakes in the company, be sure to specify this in your paperwork and clarify everyone’s roles early on. You’d then be opting for a manager-managed structure, in which only designated individuals have executive standing in the eye of the law.

Making It Work With a Partner

Entering into a potential business partnership is a big step, but hopefully, the above discussion can at least help you figure out whether it’s the right move for you and your business. Working with a partner may very well be the decision that helps propel your business to higher levels of efficiency and success.

From the extensive resources we offer to tips on how to move forward if your partner passes, we are ready to provide our expert assistance and answer any questions you may have. Our $0 + state fee LLC is the perfect way to get your partnership set up as a legal entity.