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Difference between a partnership and a limited company

Updated April 17, 2017

There are many differences between partnerships and limited liability companies. It is important to understand these differences before deciding which business type to choose when starting a new business.

Business Organization Types

If you are starting a business, the first step is choosing what business type you will use. There are several business entities, including a sole proprietorship, partnership, corporation, s-corporation, and limited liability company. Most small businesses with more than one owner choose a partnership or a limited liability company (LLC).

Partnership

A partnership is the simplest form of business organisation for multiple owners. In a partnership, owners have joint authority. This means that each partner has equal authority in binding business agreements for the organisation. The only exception is selling the assets of the partnership. Partners also share joint liability. Any partner of the company may be held legally liable for the debts of the business. Because of the issue of legal liability, you should only enter into a partnership with people you trust. A partnership is not a tax entity. Each partner files business profits and losses on his own tax return. A partnership is required to file an informational tax return to the IRS, Form 1065.

Limited Liability Company

A limited liability company falls somewhere between a partnership and a corporation. If you are the owner of a LLC, you are not personally responsible for its debts. There are some exceptions to this rule, pertaining to fraudulent behaviours of an owner. As in a partnership, the owners of a limited liability company report profits and losses on individual tax returns.

Major Differences

The major differences between a partnership and a limited liability company are legal responsibility for debts and the formal paperwork required for organisation. No special paperwork is required to form a partnership. Any two people agreeing to form a business can become a partnership. In contrast, forming a legal liability company requires filing articles of organisation and adhering to other filing requirements of the state. You have no protection from legal liability if you are in a partnership. If the business fails, you can be held accountable for debts incurred by the business. No legal personal liability exists for owners of a limited liability company.

Choosing a Partnership or a Limited Liability Company

If you are concerned with protecting your personal assets, a legal liability company would be a better choice for your business. A partnership may be right for you if you have a trusted partner and want to avoid the paperwork required to form a legal liability company. If you are looking for more information on starting a new business, contact the U.S. Small Business Administration, sba.gov. It has a wealth of information for new business owners, including a small-business planner.

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About the Author

Janet Hunt has worked in the insurance industry for more than 15 years. Now serving in online marketing, she also has expertise in business and finance topics. Hunt received her Bachelor of Business Administration from the University of Phoenix. Hunt has also worked as a food services manager for a high school cafeteria and received her school nutrition certification in 2002.