General Partnership vs LLC

If you have decided to create a joint business with a partner or partners, you are probably thinking about the business structure to choose. Well, this requires preliminary discussions and some preparation. You need to study the specifics of each business type, paying attention to such details as:

• Ability to protect personal assets;
• Branding;
• Rights and duties of the participants;
• Profits and losses distribution;
• Location, etc.

Remember, pros and cons of general partnerships vs LLCs depend directly on your business goals and expectations, as well as the specifics of your field of activity. 

If you need a quick result, then general partnerships is a good choice. 

However, if you want a legitimately registered business, you should think about the idea to form an LLC. The process of creating this business structure is longer and more expensive. But if you plan to expand in the future, it will be easier to do it as an LLC. 

You can register your business on your own or with the help of a professional online company that will take care of all the formalities.

What Is a General Partnership (GP)?

According to state law, a general partnership is an agreement between two or more people to conduct a business together. The business partner(s) may be:

• Individuals;
• LLCs;
• Corporations;
• Trusts, etc.

This type of business entity is very similar to a sole proprietorship, due to the fact that there is also no formal startup process and no fees. 

It is very easy to create a general partnership and start working. Since a GP is a separate legal entity, then it is not necessary to file the Articles of Organization in this case. Actually, all you need to do when starting a general partnership is

to choose one or more partners with whom you want to work together in the future.

It is common for a partnership to have an internal agreement. Although the state and federal government do not require it, having a written document allows you to regulate your business activity. Usually a partnership agreement includes the following key information:

• Purpose of the business;
• Terms of partnership;
• Shares of the participants;
• Rights and duties, management structure;
• Profits and losses distribution;
• Responsibility, etc.

In terms of legislation, a general partnership is a legal extension of partner(s) as individuals, and not as a separate entity. This is reflected in the peculiarities concerning the name of this business structure and the principles of division of assets of the company and its owners. 

As a rule, partnerships legally operate under members’ personal names of its owners. And personal assets and company assets are not separated. 

What Is an LLC?

An LLC is a hybrid form of business that is very popular in the USA. It has a more complicated startup process than the general partnership, due to its formality. However, it is a simpler structure than, for example, corporation. 

There are several attractive conditions for doing business as an LLC. One of them is limited liability protection, which ensures the privacy of the owners’ property. If you decide to form LLCs, then, in the event of debts or a lawsuit against the company, your property will be protected. Creditors will not be able to claim money, cars or real estate of the LLC owners, regardless of the number of claims.

Since a limited liability company is a formal business structure, you must officially register it with a state agency. The process of approval includes several steps:

1. Checking for name availability: the name of your company must be free and unique;
2. Choosing a registered agent: each LLC is required to have an official representative;
3. Drafting and filing the Articles of Organization: is a crucial document that must be filled out in order to form an LLC officially.

What Are the Advantages of the General Partnership?

The General Partnership has a number of advantages:

1. Rapid establishment: one of the main advantages is convenience and zero formation cost. To formally establish a partnership, no formal formation process, you just need to begin conducting business and start making money;
2. Specialization: the activities of the partnership can be shared among its members according to their abilities;
3. Minimum of formalities: most typical business maintenance requirements do not apply to the general partnership. They don’t need to hire a registered agent, monitor the deadlines for filing annual reports, or ensure the separation of personal assets from company funds. This general partnership’s simplicity attracts many entrepreneurs.

What Are the Advantages of the LLC?

The popularity of the LLC can be explained by its numerous advantages, such as:

• Limited liability protection: doing business as an LLC, you can be sure that your personal assets are protected. “Corporate veil” guarantees security and credibility, even if the business assets turn out to be insufficient to satisfy all creditors’ claims;
• Status and reputation: the officially-registered business structure increases the credibility and stability of the company in the eyes of potential customers, business partners and investors. Furthermore, the last feel more comfortable because of the separate finances of the LLC from the personal assets of its owners;
• Exclusive rights to the name: once an LLC is approved, a business name becomes its exclusive property;
• Flexible structure: unlike a partnership, you don’t have to find someone you can trust with your own business to form an LLC. Just start a single-member LLC without wasting time looking for a reliable partner.

How Do Taxes Work for General Partnerships and LLCs?

Although general partnerships and LLCs are structurally different, both structures are pretty similar when it comes to taxation. First of all, the IRS treats general partnerships and LLCs as pass-through entities exempt from corporate taxes. The owners split up the tax responsibilities among themselves, indicating in personal tax returns all the profits and losses of the business.

General partnerships need to file a statement of information with the IRS, but it does not involve the need to pay separate corporate taxes. The statement is informational in nature, giving details about the amount that can be expected from each of the participants.

As for the LLC, one of its advantages is the freedom to choose the tax treatment. If the Articles of Organization do not state otherwise, then there is a default structure in which the company is taxed similarly to partnerships, but that is not the only option. The LLC owners can choose:

• Taxed as a C corporation: LLCs will be taxed as separate entities, which means filing a corporate return along with the owners’ personal returns;
• Taxed as an S corporation: in this case, an LLC delegates the responsibility of filing a tax return to its owners. This allows you to avoid double taxation, because profits are taxed only when distributed to the owners, bypassing the level of the company as a whole.

How Do General Partnerships and LLCs Distribute Profits and Losses?

Whatever business structure you choose, the question of money and the distribution split is one of the most important. 

According to state legislation, the owners of general partnerships and LLCs share the profits and losses of the company between each other. But how exactly does this work in practice?

There are two ways to distribute money:

• In equal shares;
• In proportion to the amount of the contribution to the start-up capital.

Disputes over money can be a stumbling block to even the most successful business, so it’s worth considering this point in advance.

How Are General Partnerships and LLCs Managed?

The general partnership is managed equally by all of its participants. Every of the partners has managerial responsibility and can make important decisions, make deals, or manage finances. However, if you want to regulate the activities of a partnership, you should create an official record and describe the roles in a partnership agreement.

This document is not required by law, but a well-drafted partnership agreement can make things run smoothly.

As for the LLC, the type of management depends a lot on the type of the LLC. 

Obviously, a single-member LLC owner manages the business directly. But if we are talking about a multi-member LLC, the owners have two options:

• To run a company on their own;
• To hire one or more managers, outlining their rights and duties in the Operating Agreement.

Despite the fact that hiring professional managers costs some money, their help can significantly increase productivity. Also, it is convenient for very large LLCs that have a complex structure of several departments with different areas of activity.

On the other hand, a member-managed LLC is an optimal option for full control over the activities of a large company, or members of smaller LLCs operating with a limited budget.

Which Business Structure Is Preferable?

For better or for worse, there is no universally the best solution in any business. Depending on the specifics of your business, there will be advantages and disadvantages for all types of entrepreneurs without exception. 

However, in most cases an LLC has an advantage over a general partnership. And here’s why:

• Protection of personal assets of the owners: the absence of a formal process of creating a general partnership allows you to save money in the early stages. However, in the future it can cost a lot of money in the case of debts or a lawsuit against the company. The formation of an LLC ensures that, regardless of the circumstances, money, real estate and other assets of the owners will be protected.
• The best option for investors: despite the insignificant hassles of forming an LLC, in the eyes of investors it is a more legitimate and professional option than a general partnership;
• The ability to secure a unique business name: the partnership name is not registered and therefore does not receive any legal protection. Even if you get a DBA, other companies can legally use it. The rules are different for an LLC. Once the Articles of Organization are approved, the rights to the name are transferred to it. Other companies will be denied to use your registered name for their own purposes.

Also, when you make your final decision about what type of business is right for you, pay attention to the following things:

1. Ability to take personal responsibility for obligations of the company: a general partnership does not give personal asset protection, so if you do not want to pay for corporate debts with personal funds, you should choose an LLC;
2. Having partners who are willing to do business together: to form an LLC, one owner is enough. But to form a general partnership you will need at least two persons;
3. Start-up capital: there are no mandatory registration fees for a partnership, but an LLC requires some investments in the initial stage.

In Conclusion

There are many different business models, and choosing the best one for your business goals is an important step. Do it responsibly. Analyze all the advantages of each option, taking into account the peculiarities associated with it:

• Liability;
• Protection of personal assets;
• Taxes;
• Expenses.

Both the LLC and the general partnership are popular American business structures that have proven to be effective. We cannot say that one is much better or worse than the other. No matter whether you prefer a general partnership or a limited liability company, the most important thing is that it fits the interests of your business.
If you’ve already made up your mind and are ready to get down to business, think about hiring a formation service that will save you a lot of time and money. For example, ZenBusiness and LegalZoom are leaders in providing high-quality forming an LLC and business support services.