What is Partner LLC?
Can an LLC be a partnership or even a partner in a partnership?
How does a partner LLC work?
In this article, I will break down the notion of Partner LLC so you know all there is to know about it!
Keep reading as I have gathered exactly the information that you need!
Let’s see how an LLC as partnership works and all that you need to know about it!
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What Is A Partner LLC
A “Partner LLC” is sort of a misnomer as the LLC structure is not technically a partnership structure.
An LLC refers to a “limited liability company” and the owners of such a company are called “members”.
As a result, if you intend to operate a business with another person under an LLC, you’ll be considered an LLC member.
However, in the day-to-day jargon, LLC members and business owners under an LLC may call themselves “business partners” creating therefore an impression that there may be an LLC partnership status.
However, although an LLC is not the same thing as a partnership it does not mean that it’s not beneficial for “partners” to operate their business under an LLC instead of a partnership.
Before we dive into the different aspects of an LLC with two owners or more, let’s first define what is a “partnership” and what is an “LLC”.
What Is A General Partnership
A general partnership is a type of business arrangement where two or more people get together to own and operate a business.
Forming a general partnership is quite simple.
The mere act of more than two people getting together, pooling their assets, bringing in resources, and putting their time and energy towards a common business objective allows for the creation of a partnership.
General partners are entitled to equally share the business profits but are also responsible for the business debt and liability.
The advantage of a general partnership is that you do not have any particular formalities to observe or have to file any documents with the state.
Just like a person is recognized as a sole proprietor the moment he or she conducts commercial activities, when more than two individuals get together and conduct business activities, they are considered to be partners in a general partnership.
For added protection, general partners are advised to have a partnership agreement allowing them to clarify their roles and responsibilities, define how the business may be operated, agree on conflict resolution mechanisms, and agree on other important partnership terms.
What Is A Limited Liability Company
A limited liability company, also known as an LLC, is a type of business structure available in the United States that is a hybrid of a corporation and a partnership.
In essence, you can only set up a limited liability company by filing the necessary paperwork with the state authorities.
The most important advantage of an LLC is that you can operate your business under the LLC providing the business owners with limited liability protection (the same type of protection you get by forming a corporation).
In other words, in most cases, your business creditors can only come after the assets of the LLC (where your personal assets are shielded by the LLC).
Another major advantage of an LLC is that its revenues can be passed down to its members who pay taxes on their individual tax returns.
In other words, an LLC does not pay taxes at the entity level but is taxed like a partnership at the partner level.
The combination of the limited liability protection along with the pass-through taxation allows us to say that this type of company is like a combination of a corporation and a partnership.
The owners of an LLC are called “members”.
An LLC can have one member or you can have an LLC with 2 owners or more.
When an LLC is owned by one person, we may also refer to it as a single-member LLC.
On the other hand, when you have a 2 member LLC or when an LLC is owned by more than two people, we may refer to it as a multi-member LLC.
Want To Learn About LLCs?
A great book you can get to learn more about LLCs is Limited Liability Companies For Dummies
Difference Between LLC vs Partnerships
What are the differences between LLCs and partnerships?
Although you can operate a business under a limited liability company or as a partnership, there are key differences in the two structures.
Let’s look at the main differences between an LLC and a partnership.
The most important difference between an LLC and a partnership is with respect to your personal liability.
In a standard partnership, the business owners (partners) are personally liable for the business debt and obligations.
In other words, a company creditor can personally sue the partners to get paid or hold them liable for damages or other.
On the other hand, when you operate a business under a limited liability company, you are personally shielded from your business creditors.
The LLC members are not personally liable to cover the debts and financial obligations of an LLC.
Personal liability protection is one fundamental reason why many choose to form an LLC, corporation, or another type of legal entity to run their business.
Another difference between a partnership and LLC is with regards to its formation.
Forming a partnership is simpler and less costly than forming an LLC.
The moment two or more individuals get together for a common business purpose, they are considered to be partners in a partnership.
There are no filing formalities or particular compliance requirements when running a business under a partnership.
Each partner is considered to have an equal share of the business profits, losses, assets, and liabilities.
With regards to an LLC, you can form a single-member LLC if you are running the business along or you can have a multi-member LLC if you’re starting an LLC with a partner.
The formation of the LLC with one member, 2 members, or more is the same.
To form an LLC, you will need to file your LLCs articles of organization with the state.
In some states, you may also have to file a notice in the local newspaper indicating that you intend to create an LLC.
You don’t have an obligation to have an operating agreement but to avoid conflict between the partners, it may be beneficial to have one.
The area of business management is another area where you have differences between partnerships and limited liability companies.
With a partnership, each partner is a business owner and operator.
This means that the business partners are not only actively involved in the day-to-day operations and management of the business but also are entitled to their share of the business profits (and losses).
With an LLC, you can define your management structure in such a way where the members manage the business (member-managed LLC) or a non-member manages the business (manager-managed LLC).
If you have a member-managed LLC, each LLC member has opted to act as a manager and perhaps you have divided each member’s roles and responsibilities.
If the LLC is manager-manged, then an outside manager is hired to take over the day-to-day operations of the business.
Taxation is another important aspect to consider.
With a general partnership, the partners are taxed like self-employed individuals.
Each partner of a general partnership will file an informational partnership tax return and your partnership income and expenses will be reported on the Schedule C of your personal tax return.
In general, LLC companies are taxed in a similar way as partnerships.
This means that Limited liability companies are not taxed at the entity level, but rather, the business revenues are taxed in the hands of the LLC members.
Each LLC member will need to report the LLC income on their personal income tax returns in proportion to their interest in the LLC.
This is why LLCs are considered to be pass-through entities.
However, LLCs provide more flexibility than partnerships from a taxation point of view as you can choose to be taxed like a corporation if that’s more advantageous for you.
If you choose to be taxed like a corporation, you can elect to be taxed as a C Corporation or an S Corporation.
Want To Know Great Tax Strategies?
You should put your hands on the book What Your CPA Isn’t Telling You: Life-Changing Tax Strategies
Partnerships in general do not have any recordkeeping obligations, unlike LLCs or corporations.
This means that you can start a partnership in a simple way and operated it in a simple way without having too much “legal” paperwork to file and prepare on an ongoing basis.
On the other hand, some states have requirements for LLCs to report on their business and keep certain records.
This means that you will need to verify your recordkeeping obligations to ensure you file the necessary information or document with the state, as needed.
How To Setup An LLC With Partners
Many choose to form an LLC with their partners instead of opting for a partnership.
Many wonder, can an LLC have two owners?
In short, yes.
An LLC can be formed by one person (single-member LLC), you can have a two member LLC, or an LLC with more members.
The main reason why many prefer the LLC structure (even though there is more formality in creating it) over a partnership structure is that the business owners benefit from the limited liability protection and they will not necessarily be held accountable for the actions of their business partners.
Here are the steps to follow if you want to start an LLC with your business partners:
- Step 1: Create an operating agreement
- Step 2: Choose a name for your partnership LLC
- Step 3: If required by your state, publish a notice in the local newspaper announcing that you intend to establish an LLC
- Step 4: Create your articles of organization
- Step 5: File your articles of organization with the state authority (typically the Secretary of State or equivalent agencies)
There are other aspects that you should also consider.
If you want to operate your business under different trade names, consider filing for a DBA (referring to “doing business as”).
Also, to comply with state laws, your articles of organization should include:
- Your LLC partnership name
- Your LLC address
- The name of your registered agent
- The LLC member contact information
Every state may have particular requirements making it important for you to verify the specific requirements to form an LLC and to maintain it in compliance with state laws.
Partner LLC Advantages
What are the advantages of forming an LLC to operate a business with your partners?
If you are looking to start a business, are there any benefits of forming an LLC for the partnership?
The short answer is: yes!
There are two main advantages in operating a business under a partner LLC.
Parter LLCs provide legal protection to business owners against legal liability.
Legal liability protection comes in two layers:
- Partners are protected against the conduct of other partners
- The partners are protected against third parties
In a general partnership, general partners have unlimited personal liability for the conduct and actions of their other partners.
This means that if one partner goes rogue, the other partners may end up suffering financially on a personal level to compensate for the losses caused by their partner.
General partners in a partnership are therefore personally liable for their actions and that of their general partners.
In an LLC, the partners (or members of the LLC) are not responsible for the conduct or actions of the other members.
In other words, LLC members are responsible for their own conduct but not the conduct of the other members (it’s like shareholders having limited personal liability in a corporation).
Another major benefit in forming a business partnership under an LLC is with regard to taxes.
General partners in a general partnership must report their business income on their personal income tax.
In essence, the partners are like self-employed individuals reporting their business income and expenses.
With an LLC, you can choose the tax regime that is most beneficial for you.
Under an LLC, you can be taxed like a corporation, partnership, or as a disregarded entity.
If you choose to be taxed like a partnership, you’ll benefit from pass-through taxation.
When an LLC elects to be taxed like a partnership, you’ll need to file Form 1065 every hear on the partnership’s behalf and each partner will file a Schedule K-1 on their personal income tax return.
If you choose to be taxed like a corporation, your company revenues will be taxed in the hands of the LLC (you may also elect to be taxed like an S-Corp or C-Corp).
The advantage of the LLC is that you have the ability to choose the tax regime that is best for you and your business partners.
Partner In Partnership As LLC
You may wonder, can a person participate in a partnership as an LLC?
Can two LLCs form a partnership?
The answer is yes, an LLC can be a partner in a partnership.
In a general partnership, there are no restrictions as to who can serve as a partner (or owner).
This means that you can form an LLC to become a partner in a partnership (you can also form a corporation to do the same thing).
Also, you will typically not have any state restrictions on the type of business in which an LLC may participate.
In other words, in various states, there are no restrictions in having a legal entity act as a “partner” in the partnership and LLCs are not prohibited in acting as partners in partnerships.
The benefit of forming an LLC to partner up with others in a partnership is that you can benefit from the limited personal liability protection that you do not have as an “individual” or “unincorporated entity” in a partnership.
Partners in a general partnership are not only responsible towards business creditors but they may also be legally held liable for the losses caused by their other partners.
A general partner in a partnership can form an LLC to protect himself or herself from business creditors but also from other general partners.
How To Form A Successful Business Partnership?
A good book you can read on how to form a successful partnership with your business partners is Forming a Successful Business Partnership: The 9 Things You MUST Consider When Starting a Small Business with a Partner and Creating a Business Partnership Agreement
LLC Partners Takeaways
So there you have it folks!
How to structure an LLC with partners?
How many partners can an LLC have?
In this article, we’ve talked about what a “partner LLC” means, addressed the question can an LLC have 2 owners, how to set up a partnership LLC, and more.
An LLC can be formed alone or with your business partners.
If you set up an LLC with your business partners, you will each be considered as “members” instead of “partners” in the eyes of the law.
However, in the day-to-day of your business, you may very well call yourselves business partners.
There are benefits in forming a business with someone else as an LLC than a conventional partnership.
In summary, here are the reasons why many opt for an LLC to be like their “partnership”:
- Limited personal liability
- More flexible taxation
- More credibility in doing business
There are also a few drawbacks to consider:
- You need to file your articles of organization
- You may need to publish a notice in the local newspaper
- It costs more to start an LLC
- You have ongoing compliance
Overall, the benefits that you can get in protecting your personal assets and in tax flexibility may outweigh the drawbacks of establishing an LLC instead of a partnership.
I hope this article has helped you better understand the differences between LLCs and partnerships so you know how they work and which is best for you.
My Investing, Business, and Law Blog
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I practiced law in private practice where I advised and consulted entrepreneurs and business owners on many aspects of their business, such as how to start new business ventures, how to scale their business, how to navigate commercial contracts, and how to set themselves up for success.
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