When starting a business, the start of it can feel overwhelming! Not the fun part, we all love that part – the part where you get to be creative, inspiring, and follow your dreams – but the actual start of the business, where you need structure, THAT, that can be overwhelming, and more so, it requires a lot of thoughtful and strategic decision making. One of the questions I get asked frequently is, do I need an LLC or a partnership for my business? Are you wondering about that? Let’s dive more into it.
Before we get down to the fun stuff, it’s probably a good idea to clarify the difference between an LLC and a partnership. An LLC., a limited liability company, is simply put, a business structure that can combine the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation. An LLC can have one owner, or it may have many owners. A partnership is easy to form, and is always two or more people operating a business for profit. It is crucial that you have a partnership agreement if you enter into a partnership.
Partners tend to operate their business while an LLC may choose to have a member run its business or may have someone hired that has nothing to do with the LLC. These are the most SIMPLEST of explanations. To learn more about a partnership or LLC, email me.
Clients starting a new business often contemplate whether they need an LLC, a partnership, or something as simple as a sole proprietorship is enough for them. I wish there were a blanket answer I could give everyone; it would be a lot simpler, wouldn’t it? While getting an LLC seems sexy, my response to clients asking this question is, “it depends.” When starting my husband’s business, Cleer Creek Outfitters, I went to a colleague to talk through the idea of forming an LLC. His piece of advice was, “you can buy a lot of liability insurance for $800.” What he meant by that is, an LLC pays an $800 annual tax if you lose money or make money. There are corporate rules and regulations you have to follow with an LLC.
Here are a few things to think about when evaluating whether or not you want to start an LLC. or Partnership for your business:
Am I willing to risk my personal assets if the business goes south?
The most significant difference between an LLC and a partnership, in my opinion, is in their liability protection. LLC is excellent for liability because it gives you the corporate veil, so only the LLC assets are at risk versus your own personal assets. Like all things, there are exceptions to this rule.
An LLC member may be accountable via personal liability if:
- they personally guarantee a business loan
- they commit fraud or other illegal activities
- they have poorly managed the business
- There’s no distinction or separation between the business and the individual(s)
If you’re in a general partnership, each partner is jointly and severally liable for the other partner(s).
For example, if we’re partners and I make a mistake that gets us sued, the partnership assets are at stake, your personal assets are at stake, and my personal assets are at stake. Everything is at stake.
As a general rule, there’s more at stake with a partnership than an LLC, so it’s essential to have a strong partnership agreement and contract in place. How do you know it’s strong? Ask a lawyer 😉 That’s what we are here for!
Consider what you have to lose if your business is not an LLC; can you afford it?
Does my profession allow for me to have an LLC?
Not all professions are allowed to be LLCs. It probably would surprise you what professionals in California cannot be LLCs. A few examples are lawyers, accountants, architects, chiropractors, dentists, doctors, marriage and family counselors, physical therapists, veterinarians, and more.
Depending on what kind of service you’re in, you may need to look at something other than an LLC.
How much of a headache is the process going to be?
LLC requires filing formal paperwork with the Secretary of State, for partnerships there are no formal filings or registration requirements needed to create one. Whatever makes sense for your business, whether it’s an LLC, a partnership, or something else, make sure you have a strong contract to protect your business, and yourself.
In the end, the best answer to whether or not you need an LLC or a partnership for your business depends on so many different variables. It’s a good idea to always speak to an attorney for legal advice, and tax advice from your accountant.
Jessica Henman, Attorney at Law, is based in Chico, California (born and raised in fact) and is here to help out anyone in California. Give me a call at (530) 520-3109 or email me to set-up a time to talk about getting the right contracts, paperwork, and other entities in place for your business. Whether you’re a start-up or established business, I can help you through each step of the process.
I look forward to connecting with you! I’m here to help answer any questions you may have regarding business law.