How Does an LLC Differ From a Partnership?

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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.

 

Choosing whether to register your business as an LLC or a partnership can be tough. There are definitely benefits and drawbacks to each.

LLC Benefits

The Internal Revenue Service Department (IRS) won’t tax the LLC directly right off of the bat since it considers your LLC to be a unique separate entity for tax collecting purposes. You and your LLC members have more tax flexibility and you get to decide how you wish to be taxed.

Another reason many people decide to file their company as an LLC is because there is a lot less paperwork to deal with because you get to create the rules that govern your business. With less harsh requirements comes less paperwork.

LLCs also will provide you with protection from liability. You will not be responsible for debts or court judgments incurred by your business.

LLC Disadvantages

Some disadvantages of an LLC include self-employment tax, and potential for confusion about roles among the partners.

Partnership Benefits

In a partnership, each partner has an equal right to govern the company. This is a great benefit for people who want to take the reins of their own business. Another benefit is that just as with a sole proprietorship, a partnership has only one taxation level. Profits earned are given to the partners and divvied up according to their initial agreement.

Getting an EIN Simply

Both LLCs and partnerships need to obtain an Employer Identification Number, or an EIN, in order to conduct tax-related activities. You can easily and securely apply for your EIN on IRS EIN’s safe website from the comfort of your own home. You can also effortlessly check the status of your application anytime, from anywhere.

Selecting the Right Entity for an EIN

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.

Trust in us to get you an EIN within a matter of days.

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