If you’ve started a business with someone, you might be stuck on the fence about which type of business entity to establish: Limited Liability Company (LLC) or partnership?
For businesses with two or more owners, these two entities are obvious choices: they both allow for multiple owners, and they both have what’s called pass-through taxation, where the business itself does not pay federal income taxes.
However, there are some differences to be aware of that might make a stronger case for one type of business over the other.
LLC vs. Partnership
The first difference between an LLC and a partnership tax ID is that partnerships are assumed whenever two or more people go into business together, whereas LLCs must file certificates of organization with either the Secretary of State or the Department of Corporations to be recognized.
The biggest difference between an LLC and a partnership is that LLCs protect members from personal liability. In the event that an LLC is sued or incurs debt, the members of an LLC will have their personal assets protected.
Conversely, partners can be held personally liable for any debts or losses the partnership acquires. Depending on the company, and its planned business activity, this liability issue should be weighed carefully.
LLCs have annual fees that can vary in price depending on the state where you file; partnerships are generally less expensive to establish, and they don’t have annual fees.
Finally, all partnerships are required to have Employer Identification Numbers, or EIN. However, LLCs may or may not need EINs, depending on the companies and their future plans. For example, a single-member LLC without employees does not need an EIN.
That being said, it’s still a good idea to have an EIN (even if you’re planning to work alone in an LLC), because EINs allows you to open accounts and acquire credit in the name of the formed company.