A key part of starting a business is deciding the type of business structure that you want. This can be especially important if your business consists of more than one owner. Understanding the similarities and differences between a general partnership and a limited liability corporation can help you decide which best meets the needs of your business.
A general partnership is an agreement between two or more people to conduct business together under one corporate entity, with each acting as a co-owner. In a general partnership structure, each co-owner has the ability to engage in business-related activities on behalf of the partnership. Likewise, each partner is equally liable for any financial obligations incurred by the business, including legal judgments. This liability extends to personal property owned by each of the partners.
In an LLC, the business's owners are considered a separate entity from the business itself. This means that the owners' personal assets cannot be taken for any financial obligations or lawsuit resulting from the actions of the business. An LLC also provides the business owners with relative flexibilty when it comes to the distribution of company profits and losses.
General partnerships and LLCs are very different business structures. The only similarity between the two is the method by which income is reported and taxed. Neither general partnerships nor LLCs are taxed at the corporate level. Instead, any income generated by either business structure is considered "pass through" income. This means the income is passed directly to the owners, and it is then reported on individual tax returns and taxed according to the individual's tax bracket.
The most important distinction between a general partnership and an LLC is liability. A owner's financial liability in a general partnership is unlimited, as opposed to an LLC, in which the owner has no personal liability. Forming a general partnership is relatively simple, as it does not usually involve any state, county or local certifications or filing fees. General partnership do however, need to register a trade or business name. In contrast, an LLC must file formal Articles of Organization according to state law and pay ongoing business fees and expenses.