02/ 28/ 2005
by Jeffrey Moses
For many small-business startups, a limited liability company provides a blend of features found in partnerships and corporations. The corporate-like features make an LLC preferable to partnerships for many small companies.
The following comparisons between features of LLCs and partnerships can show which would be preferable for a new company:
1. The chief benefit of LLCs in comparison to partnerships is that LLCs, like corporations, are recognized as separate legal entities, meaning individual members of an LLC are shielded from debts, obligations and liabilities of the company. The extent of liability is limited to the amount that a member has invested in the company. There are exceptions, such as when an individual member personally guarantees debts or liabilities incurred by the LLC, or when the LLC is considered by a court as an "alter ego" of the owner or owners.
In contrast, individual partners of general and limited partnerships may be held fully liable (jointly and severally) for all debts, obligations and liabilities of the partnership. Some limitations may apply, of course, but most partnerships cannot provide separate legal status for partners. Consult with your attorney or business adviser for information in these regards.
There is little reason that an individual or individuals starting a new company should chose to establish the entity as a partnership. Why expose personal assets to potential company debts and obligations when an LLC can provide asset protection?
2. LLCs and partnerships are generally treated similarly for tax purposes, both locally and federally.
3. Owners of LLCs may be able to reduce their taxable income by up to 25 percent of their medical insurance costs.
4. LLCs are much easier and less expensive to set up than corporations. In fact, most states allow you to establish an LLC by filing an Articles of Organization with the secretary of state. It is wise, however, to consult with an attorney when establishing any type of business entity for liability, tax and other purposes.
5. Slightly more paperwork is required for an LLC than for a partnership, but much less than for a corporation.
6. All states except Massachusetts allow an LLC to be established and exist with a single member. (Massachusetts requires at least two members.)
7. LLCs do not require regular corporate meetings with minutes, as do corporations.
