How to Choose the Right Structure for Your Business: LLCs vs. Partnerships

Among the most important decisions you will have to make is the structure of your company. You will address this matter before you start selling products or signing contracts. The business structure you choose impacts everything from your taxes to your personal liability if something should go wrong. In addition, it impacts how your business can raise money. While there are many business structures to choose from, the three most common for small- or medium-sized businesses are the LLC, the corporation, and the partnership. Each offers distinct advantages that we will address in this article.

Understanding the LLC

The LLC is quite often the top choice for entrepreneurs. This is because it combines flexibility with protection. An LLC essentially shields owners and investors (called members) from being personally liable for problems with the LLC. In other words, their personal assets are generally safe if the business is sued or goes into debt.

In terms of taxes, LLCs are considered “pass-through” entities. This means profits and losses are reported on the members’ personal tax returns. This avoids the double taxation that corporations can face. At the same time, members can choose their LLC to be taxed like a corporation if that structure proves superior.

Another benefit of the LLC is its flexible management structure. Unlike corporations, which require formal boards and officer roles, the LLC can be managed by the members themselves. The drawback to this is that in some states, LLCs must pay an annual franchise or filing fee that can be higher than other business structures.

Understanding the corporation

Corporations tend to be more rigid than LLCs but may be the best choice for companies that plan to scale, raise capital, or eventually go public. A corporation is considered a separate legal entity. It offers strong liability protection for its shareholders.

The main downside to corporations is taxation. Traditional “C Corporations” face double taxation. In other words, they pay once at the corporate level on profits, and again at the shareholder level when dividends are paid. However, small corporations can qualify for “S Corporation” status, which allows profits to pass through to the shareholders’ personal returns. This is similar to the LLC.

The partnership

A partnership is considered the simplest way for two people to run a business. It requires very little paperwork and is usually quite easy to form. Similar to LLCs, partnerships are typically treated as pass-through entities for the purpose of taxes.

The only catch here is liability. In a general partnership, each partner is personally responsible for the debts of the business. If the business gets sued, the individual parts can be liable. Limited partnerships (LPs) and limited liability partnerships (LLPs) can reduce exposure, but they are still riskier than LLCs or corporations.

Partnerships tend to work best when the partners trust one another and when the business is relatively low risk. A partnership agreement is essential to avoid disputes over responsibilities, profits, and exits.

Talk to an Austin, TX, Corporate Lawyer Today 

Flores, PLLC, represents the interests of Texans who are looking to start a business. Call our Austin corporate lawyers today to schedule an appointment, and we can begin discussing your goals right away.