The decision about starting a business is always fraught with many difficulties and pitfalls. The complicated tasks, as you know, are easier to solve together! That is why many advanced hustlers prefer to organize a partner team to start their enterprise. However, first of all, they must decide on the type of entity.
Among aspiring entrepreneurs who prefer to work in tandem, two options are prevalent. These are limited liability companies (LLCs) and general partnerships.
So, the needs and area of the company’s operation determine which business model you choose – a general partnership or LLC.
We have taken into account all aspects of both general partnership and LLC and have prepared a detailed guide for you. Here you will find a clear and well-founded explanation of the similarities and differences between these two types of business ventures. So you can consciously decide which is the best one for you – LLC or general partnership.
General Partnerships & LLCs: Common Features
Of course, LLCs and general partnerships are very similar. The most important feature that unites them is the ability to be established and managed by multiple owners. But sole proprietorship, on the contrary, implies the conduct of business by only one person! The following mutual features are also essential:
- The organization of an LLC or a general partnership assumes the acceptance of the same tax obligations. They act as cross-cutting entities before the tax department. It means that taxes will be paid by individuals who own this business and not a general partnership or LLC. This taxation model eliminated the payment of taxes at the corporate level. So that both profits and losses are passed on to the business owners. Subsequently, this money goes to pay taxes of an individual;
- Also, the IRS considers the owners of these two types of business (a general partnership and LLC) as self-employed. Thus, the owners of enterprises with one of the specified forms of entity organization are taxed on self-employment on all their income received while doing business. At the moment it is 15.3%. It includes employer and employee shares of social security and Medicare. However, this does not mean that you will be exempt from paying income tax! It is a kind of addition to your income cess;
- The general partnership and LLC assume that the owners can distribute the profits as they see fit. These can be even / uneven beats. In addition, payments may be irregular. It all depends on the terms of the charter. In general, the partner founders have the right to resolve this issue at their discretion, depending on the business structure.
- In addition, you can also manage the business in equal/unequal shares. It is also about responsibilities and supervision of day-to-day operations. Distribute liabilities and profits within the single general partnership and LLC under the load!
So, general partnerships and LLCs are regulated within certain limits by state legislation, but, for the most part, relations within these business entities are governed by the provisions of the memorandum of association.
General Partnerships & LLCs: The Head Differences
So, we found out that these business units (general partnership and LLC) have a lot in common. Is there something that distinguishes them? – Yes, sure! The process of formation alone (or its absence) speaks volumes.
If you decide to do business with a partner, then a general partnership will be formed automatically. LLC formation takes place with the participation of the Secretary of State and will take more time and effort. This process includes several stages, of which the main one is the submission of the charter to the state government. Here you need to enter:
- the exact address of registration of the LLC;
- the purpose of doing business;
- owners’ or partner data;
- data of the registered agent (individual, agency, professional service).
Another vital difference is – when establishing an LLC, the business owners must obtain a DBA or Fictitious Name. It is necessary for running and managing a business within a particular state.
A general partnership operates under the legal names of its partners. However, they can also register a DBA and conduct business under an assumed name. But with an LLC, the opposite is true, as the founders choose a legal name while creating the entity.
There are differences in the costs of setting up these business units (general partnership and LLC). The creation of a full partnership does not require financial investments, as the process is fully automated.
If you do decide to run your business as an LLC, be prepared to pay service fees. It applies to commissions paid to the state for the formation of a business. Besides, you’ll have to pay for annual filing, franchise tax, and more.
The most significant difference is that LLC owners can protect personal assets. General partnership owners do not have this option. The LLC structure limits the liability of its founders if they receive a lawsuit against business activities, in cases where they cannot fulfill their business obligations, as well as in the event of other disputable financial situations.
Everything is simple enough! If the LLC is sued, creditors can only seize the assets of the business unit itself. They have no right to seize the assets of the founders to pay off business debts. However, there are exceptional cases that relate to the fraudulent attempts by the owner/owners or improper maintenance of the LLC.
In these cases, you’ll have no chance to use asset protection. Owners of general partnerships lack such protection initially. Thus, in the event of business debts, creditors can deprive you of your personal property (house, car, land, bank accounts, etc.).
General Partnership or LLC: which one to choose?
So, this is the most important question! Which business unit is right for your business project? As you may have guessed, it is impossible to give a definite answer. Each company is unique. However, we have tried to put together a few conclusions and hope they will help you make the right choice!
Do you want to organize an informal venture that will have no liability problems? – Then, the general partnership is the perfect option for you!
For example, if your business expects a group of teenagers to walk dogs for a fee within their area, you might be better off following the general partnership business model. While working, you can adjust some of the nuances to suit your business plan.
If you have ambitious plans and are ready to invest financially and expect high returns, you better choose an LLC. The protection of personal assets that LLCs guarantee you – is a kind of financial safety cushion. In addition, the status of an LLC makes your business activities even more significant for potential customers. They will be confident in advance about the reliability and professionalism of your company.
Of course, the similarities between a general partnership and LLC are obvious. However, it is much more significant to take into account their differences!
If you decide to start a business spontaneously and are unsure of its success and your skills, then a general partnership is your option. For all other cases, it is better to prefer LLCs.
If your child has decided to sell grandma knitted socks and wants to do so with a friend, then, of course, the general partnership model is preferable.
However, if you want a serious relationship with potential customers, then choose LLCs. So you can protect your assets and get a unique DBA that will make your business recognizable!
In conclusion, let’s emphasize that general partnership and LLC have both advantages and disadvantages! However, if you have found the time and energy to read our manual, then you are seriously puzzled by some business projects, which means that you would better prefer an LLC.