When starting a business, it is important to consider its type or something known as entity selection. This decision is not about whether you will open a laundromat or a late night restaurant; it refers to the kind of legal and financial protections you will have in your business relationships.
The details of business structures recognized by the IRS and individual states are varied. However, the differences in contractual and financial protection are essential to furthering your particular business interests. Two of the most common structures for small business owners include a partnership and an LLC, but misconceptions in the law can lead to dispute.
Understanding the nuances in the structure of your business can help you protect your interests in the everyday operation of your company but more so should a dispute arise with an internal or external party.
A partnership and an LLC are two of the most common ways to structure a business. What are the general differences under IRS standards?
Partnership
In a partnership, each party invests a portion of assets and property and shares in profits and losses. A partnership is the general starting point for business beyond a sole proprietorship. Simply put, a partnership is formed when two or more parties agree to advance mutual interests.
Partnerships have a long history in the business world. Therefore, the laws and regulations are extensive and vary state to state. However, interests in management and liability can complicate the business beyond a traditional 50/50 split.
LLC
An LLC is a limited liability company, the structure of which is relatively new to the business world. In 1988, Florida became just the second state in the country to recognize LLCs. An LLC offers the protection of ‘limited liability’ of business losses, taxes and debt to its members. An LLC has legal standing separate from its partners.
An LLC is considered a hybrid of a corporation and a partnership. Ownership is generally not restricted to sole proprietors; therefore, an LLC allows a significant level of flexibility and longevity of your business and allows you to ‘limit’ your personal liability. Although an LLC does not have to be run for profit, not all companies are allowed the same flexibility.
How do I know what’s right for my business?
Nuances in the law can make for choosing how to structure your business a complex decision. Establishing a new business can be both exciting and stressful. Clarity is best sought through advice from a seasoned attorney.
