{"id":5459,"date":"2021-10-12T21:26:38","date_gmt":"2021-10-13T02:26:38","guid":{"rendered":"https:\/\/ability-fl-prod.internetbrands.com\/ability-law\/smallbusiness\/starting-a-business\/llc-vs-partnership.html"},"modified":"2025-11-05T21:27:00","modified_gmt":"2025-11-06T02:27:00","slug":"llc-vs-partnership","status":"publish","type":"page","link":"https:\/\/www.findlaw.com\/smallbusiness\/starting-a-business\/llc-vs-partnership.html","title":{"rendered":"LLC vs. Partnership"},"content":{"rendered":"\n
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LLC vs. Partnership<\/h1>\n\n
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\n By J.P. Finet, J.D.<\/a> | Legally reviewed by Catherine Hodder, Esq.<\/a>\n | Last updated\n
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Editorial Note: We earn a commission from affiliate partner links on FindLaw. Commissions do not affect the editorial integrity of our legal content.<\/p>\n\n <\/div>\n \n

\n \n <\/i>\n Legally Reviewed\n <\/summary>\n\n
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This article has been written and reviewed for legal accuracy, clarity, and style by FindLaw\u2019s team of legal writers and attorneys<\/a> and in accordance with our editorial standards<\/a>.<\/em><\/p>\n\n <\/div>\n <\/details>\n\n

\n \n <\/i>\n Fact-Checked\n <\/summary>\n\n
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The last updated date refers to the last time this article was reviewed by FindLaw or one of our contributing authors<\/a>. We make every effort to keep our articles updated. For information regarding a specific legal issue affecting you, please contact an attorney in your area<\/a>.<\/em><\/p>\n\n <\/div>\n <\/details>\n<\/section>\n\n\n

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Key Takeaways<\/h2>\n

The most common ways for businesses with two or more owners to structure their operations are as\u00a0li<\/span>mited liability companies<\/span>\u00a0(LLCs<\/span>) or\u00a0partnerships. While there are similarities in how the two business structures<\/span> are taxed, there are notable differences between LLCs<\/span> and partnerships regarding owner liability and company management.<\/p>\n\n <\/div>\n <\/div>\n<\/div>\n\n

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Small <\/span>business<\/span> owners<\/span> who want to form a partnership may want to consider a limited liability company<\/span> (LLC<\/span>)<\/a>. Both LLCs<\/span> and partnerships<\/a> benefit from \u201cpass-through<\/span>\u201d\u00a0federal taxation<\/a>. That is where the business itself is not taxed, and its owners report any profits and losses on their personal <\/span>income<\/span> tax<\/span> return.<\/p>\n

However, the partners in a partnership are each responsible for the business’ liabilities, while the owners of an LLC<\/span> can protect their personal assets<\/span> from creditors. LLCs<\/span> are more complex to operate than partnerships, and the owners may be held personally liable for the business’s debts if the proper legal formalities are not followed.<\/p>\n

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What Is a Partnership?<\/h2>\n

A partnership is formed when two or more people or business entities<\/span> go into business together and share any profits or losses between them. Partnerships are often organized under a\u00a0partnership agreement<\/span><\/a>, but an agreement is not required. Additionally, states will usually treat partnerships as the default business structure<\/span> when a business with more than one owner does not register as a different type of entity.<\/p>\n

What Is an LLC<\/span>?<\/h2>\n

An LLC<\/span> is a legal entity<\/span> that allows its owners to enjoy the benefits of pass-through<\/span> taxation while not subjecting themselves to the unlimited liability<\/span> of a partnership. The regulations vary from state to state, but every state allows businesses to register as an LLC<\/span>. However, when companies operate in multiple states, they may be required to register in each one where they do business.<\/p>\n

Partnerships v. LLCs<\/span>: Taxation<\/h2>\n

Partnerships<\/strong><\/h3>\n

Partnerships are similar to\u00a0sole proprietorships<\/span><\/a>\u00a0in that they are pass-through<\/span> entities<\/span> that do not exist separately from their owners. That means any money earned by the partnership is passed directly to the partners and treated as ordinary personal income<\/span> for tax purposes<\/span>. The partnership itself is not taxed, and its partners avoid the double-taxation of income that occurs when a business is organized as a C-corporation<\/span> (C-corp<\/span>).<\/p>\n

LLCs<\/span><\/strong><\/h3>\n

Most business owners<\/span> who organize as LLCs<\/span> take advantage of pass-through<\/span> taxation, meaning they report their share of the business profits on their personal tax returns<\/span>. This is similar to partnerships and is the default tax treatment. However, LLCs<\/span> usually have the option of being taxed as a C-corp<\/span>. In that case, the business’s income will be subject to the corporate tax when earned by the LLC<\/span>, and the owners will pay tax<\/span> on any distributions they receive from the business. The owners of an LLC<\/span> may choose to be taxed as a corporation if they plan on reinvesting all of the company’s income back into the business and do not want to pay personal <\/span>income<\/span> taxes<\/span> on money returned to the company. This reinvestment also takes advantage of the fact that C-corps<\/span> are taxed at a lower rate than most wealthy individuals.<\/p>\n

Partnerships v. LLCs<\/span>: Liability Protection<\/span><\/h2>\n

Partnerships<\/strong><\/h3>\n

Since partnerships are not treated as entities separate from the partners, their owners have unlimited liability<\/span> for business debts<\/span>. Whereas an investor in a\u00a0corporation<\/a>\u00a0or LLC<\/span> can’t lose more than the money they contributed, partners can lose their homes, cars, and other assets if the partnership can’t cover its debts.<\/p>\n

LLCs<\/span><\/strong><\/h3>\n

The key advantage to an LLC<\/span> is that it protects its owners, called \u201cmembers\u201d from personal liability<\/span> for the debts and obligations of the LLC<\/span>. However, owner protections offered by LLCs<\/span> are not unlimited. Creditors can seek repayment from the individual owners if the company fails to comply with state legal and reporting requirements or the company is used to commit fraud.<\/p>\n

Partnerships v. LLCs<\/span>: Management and Structure<\/h2>\n

Partnerships<\/strong><\/h3>\n

Most states will allow three\u00a0types of <\/span>business<\/span> partnerships<\/span><\/a>, which include:<\/p>\n