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Part One: What is the difference between a partnership, LLC, and corporation?

| Dec 1, 2014 | Business

Deciding on a specific structure of business entity is a fundamental choice for most entrepreneurs. Some of the most common business structures are:

  • Partnership (General Partnership and Limited Partnership)
  • Limited Liability Companies (LLC)
  • Corporations (C-Corp and S-Corp)

As this blog has previously noted, there are many advantages and disadvantages to consider when choosing between the different options. As a primer for a more in-depth conversation that entrepreneurs should have with their corporate formation attorney and Certified Public Accountant, we have prepared some general guidance regarding each of the entity structures listed above. Part 1 of this 3-part blog series will focus on partnerships.

Partnership: A partnership, as indicated by its name, requires two or more persons to carry on a business for profit as co-owners. Two primary forms of partnership are used in California: (1) a general partnership and (2) a limited partnership.

A general partnership does not require any formalized agreement of the persons involved (although a partnership agreement is highly recommended) and subjects the general partners to personal liability for the obligations of the partnership. Each general partner will also be entitled to participate fully in the management of the business. Unless otherwise set forth, the death, withdrawal, or retirement of a general partner will cause a mandatory dissolution of the partnership. Also important to note, a general partnership is a pass-through entity meaning that all income of the partnership will pass through to the general partners and will be taxed at individual tax rates.

A limited partnership is slightly different than a general partnership. Specifically, a limited partnership consists of one or more general partners and one or more limited partners. Limited partners, while subject to personal liability like the general partners, are passive investors who contribute cash and other assets but exercise little control over the business decisions. Unlike a general partnership, limited partners are only subject to liability up to the amount of their investment. The death, withdrawal, or retirement of a limited partner does not cause mandatory dissolution of the entity.

Stay tuned for Wednesday’s post on limited liability companies and Thursday’s post on corporations!