When starting a business, the business founders have a choice of several legal business structures. Two of the most common forms are the partnership and the limited liability company (LLC). Each of these structures has its advantages and disadvantages, and looking at the llc partnership comparison; it seems an LLC could be a better option for aspiring entrepreneurs. However, when choosing your business structure, it would be best to consult your attorney to advise you accordingly so you can choose the one that best suits your business needs.
Advantages and Disadvantages of Partnerships
The most significant benefit of a partnership is that you can govern your business the way you want. You are under no restrictions because there are no legal structures for your business. For this kind of business, two or more people come together and start a business, and they do not have to report to any authorities.
Also, the business does not pay taxes, but it’s the partners who pay. They report the entity’s profits or losses on their personal tax returns and pay the tax, if any, due from them. The arrangement helps to lower the owners’ tax burden. Partnerships also allow owners to control their assets because there is no strict boundary between personal and the entity’s assets. Assets can freely pass into and out of business with little limitations. So, if the business is struggling financially, a partner can inject personal cash and then repay themselves later.
The critical drawback of partnerships is that owners are personally liable for the business liabilities and even can be sued for business matters. As such, the assets of the business owners are not protected.
Advantages and Disadvantages of LLCs
Structuring a venture as an LLC has the main advantage of the members or owners having limited liability. This means the members cannot be held liable for the disadvantages of the business. Another advantage is that LLCs have several taxation options because members can choose to be taxed as a corporation or a sole proprietorship, which can apply mostly for a single-member LLC.
If the owners do not choose the taxation option, the tax authorities treat the LLC as a corporation. LLCs also have the advantage of not having many strict legal requirements like corporations but only to abide by their state’s rule for those business types.
The major disadvantage is that if the Operating Agreement does not clearly define each member’s role, there can be confusion on what each should be responsible for. This is because these entities must not have directors. Additionally, if the members do not choose to be taxed as a corporation, they will pay self-employment tax, which is higher.