General partnership vs LLC: unraveling the key differences

Introduction

Limited liability companies (LLCs) and general partnerships are two common structures for multi-member business ventures and joint ownership. Both offer pass-through taxation and flexibility for small businesses.

However, there are important legal and operational differences between LLCs and general partnerships that impact liability exposure, management structure, continuity of the entity, investor appeal, and other factors.

This guide compares general partnerships and LLCs across key dimensions including:

• Liability protections
• Management and profit/loss distribution
• Ability to raise capital
• Transfer of ownership interests
• Succession and perpetuity
• Tax treatment and filing requirements
• Decision-making and dispute resolution
• Asset handling during dissolution

Understanding the tradeoffs between LLCs and general partnerships is crucial for entrepreneurs to select the ideal structure for their business goals, risks, and ownership approach. 

This comparison provides an overview of the core distinctions to inform the choice between LLC and partnership entities.

What are the main differences between a general partnership and an LLC?

Definition and key traits of a general partnership

A general partnership is when two or more individuals go into business together to share profits and losses. It’s considered the simplest and most flexible structure for a jointly owned business entity. 

Here are some of its key characteristics:

• Easy formation with almost no paperwork – no formal registration with the state typically required. A written partnership agreement is recommended but not legally required in most states. Can often be formed accidentally or by default.
• Partners split management and control equally unless partnership agreement states otherwise. Decisions are made jointly.
• Partners share all liabilities and debts. Each partner is personally responsible and can be held accountable for the actions of the other partners.
• Profits are divided equally between partners by default, unless stipulated differently in a partnership agreement.
• General partnerships do not provide liability protection or limit the liability exposure of each partner.
• The business itself does not pay income taxes. All profits/losses flow through to the individual partners to be reported on their personal tax returns.
• If a partner leaves, dies, or retires, the partnership dissolves by default unless stipulated otherwise in a formal partnership agreement.
• Easy to terminate the partnership and go separate ways if relationships break down. Minimal government regulations and compliance requirements.
• Structure is very flexible – partners can draw up a partnership agreement to customize profit/loss distributions and operational details.

In summary, the main traits of a general partnership are pass-through taxation, unlimited personal liability, joint management control, default profit sharing ratios, flexibility, and an unstable business structure.

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Definition and key traits of an LLC

A limited liability company (LLC) is a more formal business structure that combines aspects of partnerships and corporations. Here are some of its key characteristics:

• Requires more formal registration and paperwork to establish than a general partnership – articles of organization must be filed with the state.
• An operating agreement outlines the LLC’s financial and operational decisions like profit distributions, voting rights, and rules for its managing members.
• LLCs provide personal liability protection for members – their personal assets are protected from business debts and legal claims. Exceptions apply in cases of fraud/reckless actions.
• Profits pass through to members and are taxed personally. The LLC itself does not pay federal income tax. However, members can elect corporate taxation if desired.
• Management can be member-managed (by owners) or manager-managed (hired managers run operations).
• The entity has flexibility in allocating profits/losses to members as outlined in the operating agreement.
• Members can sell and transfer ownership interest in the LLC through membership units.
• More compliance requirements than general partnerships – must file annual reports with the state to maintain status.
• An LLC can persist beyond the withdrawal or death of a member, ensuring continuity of the business structure.
• The process for dissolving an LLC is more complex than ending a partnership and requires state filings.

In essence, the main characteristics of an LLC are personal liability protection, pass-through taxation, operational flexibility, and a more formal business structure than a general partnership.

Main differences in taxation, liability protection, management structure, flexibility, profit distribution, paperwork and compliance

When it comes to taxation, liability protection, management, flexibility, profit-sharing, paperwork, and compliance – there are significant differences between general partnerships and LLCs:

• Taxation: General partnerships offer pass-through taxation only. LLCs can choose between pass-through taxation or corporate taxation if desired.
• Liability protection: General partnerships provide zero personal liability protection. LLCs give members liability protection with some exceptions.
• Management structure: Partners in a general partnership have equal management rights. LLCs can be manager-managed or member-managed.
• Flexibility: General partnerships are more flexible in terms of profit distributions defined in the partnership agreement. LLC operating agreements also provide flexibility but require more planning.
• Profit distribution: Partnership profits are divided equally by default. LLCs allow customized profit allocations outlined in the operating agreement.
• Paperwork and compliance: General partnerships have almost no formal compliance requirements. LLCs involve more state paperwork filings, documentation, and annual compliance.
• Continuity: General partnerships dissolve easily if a partner departs. LLCs can continue seamlessly if a member leaves or passes away.

So in summary, LLCs provide more benefits through limited liability, tax options, operational flexibility, and business continuity – but require more formal planning and compliance. General partnerships are much easier to set up but lack those key protections.

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General overview of how they compare across core aspects

Looking at both business structures holistically, we can summarize the key differences between general partnerships and LLCs:

• Formation: General partnerships are extremely easy and quick to establish with almost no paperwork. LLCs require more formal registration and documentation to form.
• Taxation: General partnerships only permit pass-through personal taxation. LLCs provide choice between pass-through taxation or corporate taxation.
• Liability protection: Partners in a general partnership have unlimited personal liability. LLC members have liability protection with some exceptions.
• Management: Partners jointly manage a general partnership. LLCs can choose between member-managed or manager-managed.
• Profit distribution: Partnership profits are divided equally by default. LLC operating agreements define profit allocations.
• Flexibility: General partnerships are extremely flexible in terms of partnerships agreements. LLCs are also flexible but require more planning.
• Formality: Almost zero ongoing formalities for general partnerships. LLCs require more compliance filings and paperwork.
• Continuity: General partnerships dissolve easily if a partner departs. LLCs can persist beyond a member’s departure.

In summary, LLCs provide liability protection, taxation options, and continuity benefits that general partnerships lack – but require more planning and compliance. General partnerships are much simpler but offer minimal protections or formality.

What are the requirements for forming a general partnership vs an LLC?

Steps for forming a general partnership – registration, partnership agreement

Forming a general partnership is fairly straightforward and informal, with few required steps:

• Find partners and agree to start a joint business venture. This creates a general partnership by default in most states even without paperwork.
• Although not legally required, it’s highly recommended to have a written partnership agreement outlining profit/loss distributions, partner roles, voting rights, dispute resolution and other terms. This allows partners to customize the terms rather than relying on default state rules.
• Register your business name by filing a Doing Business As (DBA) form with your county or state. This allows you to operate under a business name rather than partners’ personal names.
• Obtain necessary local or state business licenses and permits. Requirements vary based on location and business activity.
• Set up a shared business bank account for partnership finances and transactions. Partners are granted access based on the partnership agreement.
• File for an Employer ID Number (EIN) with the IRS if you plan to hire employees or open retirement accounts.
• Report partnership profits or losses on your personal tax returns. The partnership itself does not pay taxes.

And that’s it! Registration with the state is generally not required. The simplicity and lack of paperwork makes general partnerships attractive for small business partners. But it comes with serious liability exposure.

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Steps for forming an LLC – articles of organization, operating agreement

Forming an LLC involves more formal steps and paperwork than a general partnership:

• Choose a business name that complies with your state’s naming requirements. Do name availability search.
• Draft and file Articles of Organization with your Secretary of State, the primary document for establishing the LLC. It must include certain information like business name, registered agent, business purpose, etc.
• Create an Operating Agreement outlining the LLC’s procedures and policies. This is like an instruction manual and covers topics like member roles, voting rights, capital contribution, profit/loss distribution, changes in membership, and dissolution protocols. Not required in some states but highly recommended.
• Obtain necessary local or state business licenses and permits that apply to your LLC’s activities. Requirements vary by location.
• Set up a dedicated business bank account in the official name of the LLC to keep finances separate from your personal funds.
• If hiring employees, apply for an EIN through the IRS to identify your business for tax purposes.
• Familiarize yourself and comply with your state’s annual filing requirements and fees to maintain the LLC status each year.

The process involves more upfront time and planning. But the payoff is personal liability protection and more flexibility and options in the long run. Consult an attorney to ensure you’ve covered all the proper legal and operational bases.

More formal structure and filings required for LLC vs general partnership

Forming and maintaining an LLC requires significantly more legal formalities, paperwork, and compliance filings than creating a general partnership:

• LLCs must draft and file formal articles of organization with the state to establish the business structure. General partnerships can be formed without any required registration or documentation.
• LLCs need an operating agreement outlining financial and management procedures. Partnerships also benefit from a partnership agreement, but it’s not legally required.
• LLCs must file annual reports and maintenance fees with their state to preserve limited liability status. Partnerships have no such annual compliance requirements.
• Any changes to an LLC’s membership or operations must be formally filed and recorded through state amendment processes. Partnership changes can be handled more informally.
• LLCs provide more continuity if a member departs, but the transfer of membership interest requires legal documentation. Partnership interest transfers are generally more flexible.
• Dissolving an LLC involves state filings and procedures. Ending a general partnership is typically more straightforward.

In summary, those seeking the protections and continuity of an LLC must be ready to commit to more administrative maintenance, paperwork, and compliance filings on an ongoing basis. 

General partnerships offer minimal formalities in return for less structure and liability coverage.

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Most states require less for forming a general partnership

When it comes to business formation requirements, most states have much lower barriers to creating a general partnership compared to an LLC:

• General partnerships can be formed automatically in many states based on the verbal or written association of partners to carry on as co-owners of a business. No formal registration is required.
• LLCs necessitate filing articles of organization with the state to legally establish the business structure. This involves paperwork, fees, and maintenance of status.
• Partnerships allow partners to divide up management, voting rights, and profit distribution based on their partnership agreement terms. LLCs also utilize operating agreements but require state filings if any changes are made.
• Partners can leave a partnership at any time through voluntary withdrawal. LLC membership departure involves transferring interest based on operating agreement guidelines and compliance with state rules.
• General partnerships dissolve by default if a partner departs. LLCs are designed to persist beyond member withdrawals or departures.
• Partnerships require no annual filings or fees. LLCs must submit annual reports and maintenance fees to the state.

In essence, forming and maintaining a general partnership is significantly less complex in most states. The barrier to entry is low, but so are the protections. LLCs provide more continuity and independence, but involve more rules and red tape.

Discussion of business licensing, naming requirements

When establishing either a general partnership or LLC, partners/members must complete business licensing and naming requirements at both the state and local level:

• General partnerships and LLCs need to register a unique business name that follows naming guidelines in their state. This includes rules around distinguishability and allowed terms or designations.
• Both entities need to check name availability to avoid infringement and file for “Doing Business As” (DBA) registration if operating under a fictitious business name.
• General partnerships and LLCs must obtain any required state licenses for their industry or business activities prior to operations. Common examples are licenses for retail sales, restaurants, professional services, construction contractors, etc.
• Local business licenses, permits, and zoning approvals may also be necessary depending on the city, county, or municipality in which the business is located and the type of operations.
• If hiring employees, both partnerships and LLCs need to apply for an Employer Identification Number (EIN) from the IRS and follow labor regulations.

In summary, general partnerships and LLCs face very similar requirements when it comes to business licensing and naming protocols at the local and state level. 

The key differences arise more from the paperwork and formalities necessary to legally form and maintain the business entity status.

How are general partnerships and LLCs taxed differently?

Overview of pass-through taxation for partnerships and multi-member LLCs

General partnerships and multi-member LLCs both allow for pass-through taxation, although LLCs have more flexibility:

• With pass-through taxation, no taxes are paid at the entity level. Profits/losses pass directly to partners and members to be reported on their personal tax returns.
• This avoids double taxation – business income is only taxed once at the individual level, not both the corporate and individual level.
• General partners report their share of partnership income or loss on Schedule K-1 with their personal Form 1040 tax return and pay taxes at individual income tax rates.
• Multi-member LLC members also receive a Schedule K-1 but have the choice of filing as a partnership, sole proprietorship, S-corporation, or C-corporation.
• Self-employment tax of 15.3% (Social Security + Medicare) applies to general partnership and LLC active member income.
• LLCs can save on self-employment taxes by paying members a reasonable salary + distributions rather than only partnership draws.

In summary, from a high-level federal tax standpoint, general partnerships function similar to multi-member LLCs taxed as partnerships. But LLCs provide more options like corporate taxation if desired.

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LLCs can elect corporate taxation if desired

A key advantage of LLCs is the ability to choose between pass-through taxation or corporate taxation:

• By default, multi-member LLCs are taxed as partnerships if no election is made. This means no taxes at entity level; profits/losses flow through to members’ personal tax returns.
• However, LLCs can elect to be taxed as an S-corporation by filing Form 2553 with the IRS. This allows company profits/losses to pass through to personal returns similar to a partnership.
• LLCs can also opt to be taxed as a C-corporation by filing Form 8832 with the IRS. This means the LLC pays corporate taxes on net income. Members pay individual income taxes on dividends distributed by the LLC.
• Electing corporate taxation for an LLC comes with admin costs but can provide benefits like lower self-employment taxes or facilitating company growth and sales of ownership interest.
• General partnerships do not have any options when it comes to taxation. Income automatically passes through partners’ personal returns. No corporate taxation is permitted.

In summary, the ability to choose between pass-through taxation or corporate taxation (S-corp or C-corp) is a major advantage unique to the LLC structure. General partnerships only allow for pass-through personal taxation.

Self-employment tax considerations

When it comes to self-employment taxes, general partnerships and LLCs are similar but a few key differences exist:

• Active general partners and LLC members pay self-employment tax of 15.3% on partnership or LLC income that flows through to personal tax returns.
• This covers both the employer and employee portion of FICA taxes – Social Security at 12.4% and Medicare at 2.9%.
• For LLCs taxed as S-corps, members can take a reasonable salary subject to payroll taxes while distributions aren’t subject to self-employment tax.
• LLCs taxed as C-corps also only pay payroll taxes on wages paid to members who are employees. No self-employment tax except on the corporate side.
• General partnerships don’t have any options to reduce self-employment tax exposure since all partner income is subject to this tax.

In summary, LLCs taxed as S-corps or C-corps have potential tax savings options to reduce the blow of self-employment taxes. General partnerships do not have any such options.

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LLC single member entities avoid double taxation

A major tax advantage of single member LLCs is the ability to avoid double taxation:

• Income from single member LLCs passes through to the individual member’s personal tax return.
• At tax time, the LLC’s profits or losses are reported on the owner’s Schedule C and taxed at personal income tax rates. No separate business income tax filing for the LLC itself.
• This differs from a C-corporation, where income is taxed at both the corporate level and shareholder level. Corporate income is subject to taxation when earned, and taxed again as dividends or capital gains.
• By providing pass-through taxation and LLC protections, single member LLCs avoid this double taxation scenario. Business income is only taxed once on the member’s personal tax return.
• If an LLC ever expands to have multiple members, it can still elect S-corp status to have income, deductions and credits pass through to the members’ personal returns.
• No such pass-through option exists for sole proprietorships to avoid double taxation if they incorporate later.

In short, single member LLCs provide the best of both worlds – liability protection and pass-through taxation. This avoids double taxation while allowing beneficial business deductions to flow to the member’s personal return.

Implications of active vs passive member status

Both partnerships and LLCs make a distinction between active and passive members which has tax and liability implications:

• Active members participate in the operations and management of the business. Their share of income is subject to self-employment taxes.
• Passive members are hands-off investors. They avoid self-employment taxes, but in an LLC their liability protection may be weaker.
• LLCs and partnerships must issue K-1s allocating profits/losses to all members. Active K-1 income is subject to self-employment tax. Passive is not.
• To optimize taxes, some active LLC members can take a small salary and remaining income as distributions. Only the salary portion has payroll tax.
• Net income allocated to limited partners in a partnership is exempt from self-employment tax and considered passive.
• General partners have active management roles so their share of partnership income gets self-employment tax.

In summary, active member or partner status triggers self-employment taxes. But active participation may also increase liability exposure, something for LLC members to consider.

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Examples and numerical comparisons to demonstrate taxation differences

Let’s look at some examples to compare how income taxes and self-employment taxes differ for general partnerships vs LLCs:

• A general partnership has two partners who each receive $100,000 of pass-through income from the partnership activities. Each partner pays income tax on $100,000 based on their personal tax rate. In addition, each owes self-employment taxes of $15,300 on their share (15.3% of $100,000).
• A two-member LLC taxed as a partnership also passes through income to members’ personal returns. If each member earns $100,000, they will pay income tax and the same $15,300 self-employment tax as the general partners.
• If the two-member LLC elected S-corp taxation, the members could reduce self-employment taxes by taking a reasonable salary (say $40,000) and the rest ($60,000) as distributions. Only the salary portion has payroll taxes.
• For a single member LLC with $100,000 of income, the sole member pays income tax and self-employment tax of $15,300 on the full $100,000. No payroll tax savings option.

In summary, active general partners and LLC members face the same self-employment tax exposure, while S-corp LLC members have potential tax savings options by mixing salary and distributions.

How does liability protection differ between a general partnership and an LLC?

General partnerships offer zero liability protection

A major downside of general partnerships is the lack of personal liability protection for partners:

• General partners are personally and jointly liable for all partnership debts and legal liabilities. Their personal assets are at risk.
• If the partnership is sued or cannot pay a business debt, the creditors can pursue each partner’s personal bank accounts, cars, homes, and other property to satisfy the obligation.
• Partners are also liable for any negligent actions, wrongful business decisions, or misconduct committed by other partners during partnership activities.
• There is no separation between personal and partnership assets and liabilities. Partners’ exposure is unlimited.
• To limit risk, partners must rely on insurance and safe business practices. Umbrella policies help defend against certain claims.
• But there are no entity-level protections. Each partner essentially takes on the full business liability burden.

In short, general partnerships provide zero liability shielding for partners. Their personal assets are fully exposed by partnership risks and obligations. An LLC provides superior protections.

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LLC offers liability protection for members, with some exceptions

A major advantage of LLCs is that they provide personal liability protection for members, with some caveats:

• LLC members enjoy limited liability for business debts and legal claims. Their personal assets are generally shielded.
• However, certain exceptions can pierce the corporate veil and expose members personally:
• Fraudulent or reckless actions by the LLC that harm others.
• Co-mingling personal and LLC funds.
• Failing to properly form the LLC or maintain formalities.
• Undercapitalizing the LLC so it can’t cover obligations.
• Using the LLC status improperly to secure credit.

In summary, the LLC structure provides substantial liability protections for members – but they must take care to formally maintain the LLC and adhere to legal requirements. Some partner negligence can still potentially lead to personal exposure.

Examples of risks and exposure for general partnership members

Here are some examples that illustrate the substantial personal liability risks for general partners:

• If the partnership falls behind on rent or vendor payments, the landlords or suppliers can go after each partner’s personal bank accounts and assets.
• If the business is sued for a slip-and-fall accident on the premises, or for harms caused by faulty products, the plaintiff can target the personal assets of the partners.
• If one partner makes an improper business decision that leads to substantial losses for the company, the other partners can be held personally liable for the consequences.
• If the partnership incurs sizable debt that it cannot repay, such as business loans or lines of credit, the creditor can seize partners’ personal property.
• If the business fails and files bankruptcy, creditors can take collection action directly against the general partners individually.

In essence, each general partner is exposes their entire personal fortune to partnership risks and liabilities. Plaintiffs will go after both business and personal assets to satisfy judgments. Forming an LLC instead limits this exposure.

How LLC status limits personal liability for business debts and claims

LLC status provides members with protection against personal liability for business obligations and claims due to:

• Separate entity status – The LLC is legally its own entity, separate from members. This shields personal assets.
• Limited liability – Unless they co-sign, members are typically not personally responsible for LLC debts and liabilities. Creditors can only seize LLC assets.
• Charging order protection – A creditor granted a charging order against a member’s LLC interest can only receive distributions. They have no management rights and cannot force liquidation.
• LLC veil – This separation makes it more difficult to “pierce the veil” and hold LLC members personally liable unless they failed to follow formalities or committed fraud.
• Indemnification – LLC operating agreements often limit members’ personal liability through indemnification clauses for third party claims.

In short, the LLC structure creates a legal partition between business and personal assets. Members enjoy protections from liability absent misconduct or negligence. Creditor and plaintiff recourse is generally limited to the LLC’s assets.

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What are the management and profit distribution differences?

Member-managed vs manager-managed structures for LLCs

When forming an LLC, members must choose between a member-managed or manager-managed structure:

• In a member-managed LLC, all members participate equally in managing the business and have equal voting rights by default. This is similar to a general partnership.
• A manager-managed LLC has appointed managers who handle day-to-day operations. Members have limited control like passive investors. This resembles a limited partnership.
• The operating agreement specifies if an LLC will be member-managed or select official managers. Members can still be managers in a manager-managed LLC.
• Manager-managed structures allow members who just want investment exposure to have limited liability but not direct management responsibilities.
• Larger LLCs commonly designate managers for smoother decision making. Member-managed LLCs work better for smaller, hands-on partnerships.

In summary, a key advantage of LLCs is the flexibility to customize management and control through the operating agreement. General partnerships don’t have centralized management options.

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No flexibility on management structure for general partnerships

Unlike LLCs, general partnerships do not have options when it comes to management structure:

• General partnerships only allow for equal, collective management by all partners. This is considered a member-managed structure.
• There is no concept of passive limited partners like in a limited partnership or manager-managed setup. All GP partners have equal rights and responsibilities.
• The partnership agreement governs voting percentages and distribution of authority, but partners jointly run day-to-day business activities.
• No partners can be strictly passive investors enjoying profits without also assuming management duties and liabilities.
• Disagreements over material decisions require collective consent based on pre-defined voting rules in the partnership agreement.

In essence, the default general partnership structure requires all partners to actively co-manage the business. There is no flexibility for passive investors or appointed non-partner managers.

Different options for allocating profits in an LLC via operating agreement

A key advantage of LLCs is the flexibility to allocate profits and losses in an operating agreement:

• LLC members can divide profits equally based on ownership percentage, similar to a general partnership.
• Alternatively, the operating agreement can split profits based on capital contributions. Members who contributed more equity receive a larger share.
• Profits can also be allocated according to members’ proportional usage of LLC assets/services for business activities.
• LLCs can issue different classes of membership with different profit allocation formulas for each class.
• LLC operating agreements allow for customized profit sharing rules and ratios between members. General partnership agreements do not provide this flexibility.

In summary, the operating agreement allows LLC members to elect creative profit allocation structures beyond just splitting income evenly. General partnerships lack this ability to customize partner profit shares.

General partnership profits divided equally by default

Unlike LLCs, general partnerships lack flexibility when it comes to allocating profits and losses:

• By default, general partnership profits and losses are divided equally among all partners.
• The partnership agreement can specify different profit/loss sharing ratios, but equal splits are most common.
• There is no concept of different membership classes with varying distribution rights like in an LLC operating agreement.
• General partner profit allocations cannot be based on capital contributions or proportional asset usage. Only ownership percentage applies.
• Partnership income is either distributed according to ownership percentage, or per customized ratios outlined in the partnership agreement.

In essence, general partnership profit distributions are limited to only ownership-based splits or ratios explicitly defined in the partnership agreement. LLCs offer more creative options.

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Financing, Capitalization, and Ownership Differences

Ability to raise capital through selling partnership shares vs LLC membership units

Both general partnerships and multi-member LLCs can raise funds by admitting new partners/members, but LLC membership units provide more flexibility:

• Partners can sell percentages of the general partnership interest to new partners to raise capital, but all partners have equal management and liability.
• Multi-member LLCs can issue membership units to new members to raise funds. Units can have different management power, profit rights, or asset claim priorities.
• LLCs can create preferred units with guaranteed payments but limited voting power, similar to preferred stock in a corporation. Partnerships lack this flexibility.
• It is easier for LLCs to raise funds from investor members who want passive limited liability and returns without direct management control.
• By contrast, every general partnership unit holder is a general partner with associated management duties and full liability.

In summary, selling partnership interests and LLC membership units can both raise capital, but LLCs allow more customizable member rights. This makes attracting investment easier.

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Financing flexibility and attractiveness to investors

LLCs have advantages in financing flexibility and attractiveness to investors compared to general partnerships:

• LLCs can issue different classes of membership units with varying rights, preferences, and profit allocations tailored to attract investors.
• General partnerships lack flexibility – all partners have equal rights and responsibilities. Custom preferred partnerships units are not possible.
• LLC membership units can be made non-voting to appease investors who just want returns without direct management control.
• LLCs have the option to elect S-corp status or C-corp status to alter tax treatment and self-employment tax exposure, making them more investor-friendly.
• LLCs provide inherent liability protections to members. General partnerships do not shield any partners from risks.
• Large institutional investors may be wary to invest in general partnerships due to unlimited liability but more open to LLC equity.

In summary, the adaptability of LLC membership units and built-in liability shields make LLCs better equipped to court outside investors compared to general partnerships.

Transfer and valuation of ownership interests

The transfer of ownership interests operates differently between LLCs and general partnerships.

General partnership interests are freely transferable by default. Partners can sell, gift, or bequeath their partnership shares without consent from other partners.

LLC membership units have far greater restrictions around transfers. The operating agreement typically prohibits transfers without approval from other members.

Partnership interests pass by law to heirs if a partner dies. LLC membership units are void if transferred without member approval, even through inheritance.

LLC operating agreements also often have rights of first refusal. Existing members get priority and set purchase terms if a member wishes to sell their interest.

Valuing ownership units is generally simpler for partnerships based on profit/loss sharing ratios. More factors affect membership unit value due to preferential distribution rights.

In essence, LLC membership units have more complex transfer and valuation considerations compared to relatively open and straightforward general partnership interests.

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Estate planning and succession planning considerations

Both general partnerships and LLCs have estate planning considerations around ownership transfers upon death or retirement:

Partnership agreements should address succession planning for buying out partners who exit due to retirement or passing away. The entity can dissolve if no plan exists.

LLC operating agreements are the key place to outline succession terms and restrictions on transfers, including rights of first refusal.

General partnership interests can freely transfer to heirs upon death by default. LLC membership units often fully expire at death.

LLCs allow more customization around transfers and succession planning in the operating agreement. Partnership agreements have less flexibility.

Proper entity buy-sell and succession planning is crucial for both partnerships and LLCs to continue beyond founding owners leaving or passing away.

In summary, succession planning is vital for sustaining any jointly-owned business long-term. LLCs provide more options to customize transfer restrictions and terms in operating agreements.

Recordkeeping, compliance, and State law considerations

Compliance and annual filing differences between LLCs and general partnerships

LLCs and general partnerships have some key differences when it comes to compliance requirements and annual filings:

LLCs must file articles of organization upon formation to legally establish the entity. General partnerships can be formed without any formal registration.

LLCs must adhere to more formalities like keeping minutes and records of all major business decisions. Partnerships have fewer statutory formalities.

Partnerships file an annual information return (Form 1065). Single-member LLCs report on Schedule C with no separate filing.

Multi-member LLCs also file a Form 1065 but must additionally submit an annual report and fee to the state to remain in good standing.

LLCs face potential loss of liability protection if they fail to properly follow state compliance rules and formalities. Partnerships have no liability shield to maintain.

In essence, the liability shield granted to LLCs comes with more legal formalities compared to general partnerships. But proper compliance reduces personal liability exposure.

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State law variations and impact on entity decision

There are some key state-by-state differences in partnership and LLC laws to consider:

LLC statutes can vary widely state to state, so uniform LLC operating agreements may not be enforceable everywhere. Partnership law is more consistent nationwide.

Certain states are more favorable for LLCs due to lower fees, fewer restrictions, and stronger liability shields. Shopping for the optimal state is an option.

The level of compliance formalities and paperwork filings for LLCs also varies by state. More lax states make maintenance easier.

Some states allow LLCs to file as partnerships federally while still providing liability limitations under state law. This allows pass-through partnership taxation.

For multi-state businesses, conflicts between state LLC laws create complexities that partnerships avoid. But LLC protections remain attractive.

In summary, state-to-state variances in statutes must be reviewed when choosing between partnership and LLC business forms. Legal distinctions can impact the decision.

Naming and business licensing requirements

LLCs and partnerships have some different rules around entity names and licensing:

LLCs generally must include descriptive designators like “Limited Liability Company” or “LLC” in the official name. Partnerships do not require specific words.

LLCs file articles of organization to formally register the name and establish the entity. No similar filing is required for general partnerships.

Partnerships and sole proprietor LLCs can operate under DBAs without officially forming an entity. Multi-member LLCs normally register a formal name.

LLCs and partnerships both need any required local or state licenses for the type of business, like food service permits, professional licenses, sales licenses, etc.

LLCs provide more name protection – two LLCs cannot register identical names. Duplicate partnership names are permitted since no formal registration occurs.

In summary, LLCs have more stringent naming rules and filing requirements, but this grants official name protection. Partnerships allow duplicative names.

Continuity of Life and Business Valuation

Implications for business continuity: LLCs vs general partnerships

LLCs often provide advantages for ongoing business continuity compared to general partnerships:

LLCs allow restrictions on ownership transfers to be customized in the operating agreement, ensuring continuity when members depart. Partnership interests freely transfer by default.

The inherent liability protections of LLCs lower risks to continuity from lawsuits or bankruptcy. General partnerships expose all partners to unlimited liability.

LLCs permit centralized management structures that support continuity through manager oversight versus requiring collective partner decisions.

LLC operating agreements can establish succession plans, while partnership agreements rarely address succession details. This sustains the business when partners retire or pass away.

LLCs also better facilitate injecting capital through preferred membership classes without disrupting operations. Partnership capital raising can alter control.

In summary, the adaptability of LLCs enables continuity planning for ownership changes, liability risks, managementstructure, succession, and financing. General partnerships are less customizable.

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Business valuation: partnership interests vs LLC membership units

Valuing partnership interests and LLC membership units involves some key differences:

General partnership interests are valued based on the partner’s percentage share of profits/losses per the partnership agreement. Adjustments are made for control rights.

LLC membership unit valuation is more complex due to potentially different distribution and control privileges per class. Preferred units add complexity.

Lack of marketability discounts may be steeper for partnerships since member approval is required to transfer LLC units. Partnership interests are freely transferable.

Minority discounts are common in larger LLCs when selling non-controlling units. Partnership interests come with joint control.

More weight may be placed on liquidation rights in LLC valuations. Partners have no special liquidation claims beyond capital accounts.

In essence, partnership interest valuation is relatively straightforward based on profit sharing. LLC membership units require appraising differing distribution and control rights.

Decision making, dispute resolution, and treatment in bankruptcy

Decision-making processes and differences in dispute resolution

LLCs and partnerships handle decision-making and disputes through different frameworks:

Unanimous consent of partners is required for many major partnership decisions per default rules. LLCs are more flexible – operating agreements can lower vote thresholds.

LLCs allow appointing managers to make decisions without requiring full member approval. Partnerships lack centralized management.

If fundamental disputes arise, partnerships can completely dissolve without agreement to continue. LLCs have more flexibility to buy out dissenting members.

LLCs can establish mediation and arbitration procedures in operating agreements. Partnership agreements rarely cover dispute resolution processes.

Judicial dissolution and winding up procedures vary more by state for LLCs versus more standardized partnership dissolution laws.

Overall, the centralized management options and contractual flexibility of LLCs allow more alternatives for tackling decisions and disputes compared to the unanimity norm of partnerships.

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Treatment during bankruptcy: Asset partitioning and creditor claims

LLCs and general partnerships have very different treatment in bankruptcy scenarios:

General partners’ personal assets are at risk from partnership creditor claims during bankruptcy. LLC members receive liability protection, if properly structured.

During bankruptcy liquidation, LLC assets partitioned from personal property are sold first to settle debts. Partnership creditors can pursue partners’ personal assets.

A partner’s creditor can force liquidation of partnership assets. An LLC creditor cannot force distributions or dissolution without member consent.

If one LLC member declares bankruptcy, the membership interest becomes property of the bankruptcy estate. The underlying LLC remains intact.

A partnership effectively dissolves upon a partner entering bankruptcy absent consent to continue from the bankruptcy trustee.

In essence, the liability shielding of LLCs provides much greater protection from personal bankruptcy compared to a general partnership interest.

What happens when a general partnership or LLC dissolves?

Dissolution process for general partnerships based on state laws

State general partnership laws outline the dissolution process when a partnership dissolves:

A partnership dissolves and starts winding up upon an event like a partner’s death, retirement, resignation, expulsion, or bankruptcy. It can also dissolve by the will of partners.

The partnership continues to exist during winding up until all remaining assets are distributed and creditor liabilities are paid from asset proceeds.

Remaining partners can decide to continue operating after accounting for the outgoing partner’s interest by purchasing their shares. This avoids full dissolution.

If assets are insufficient, creditors can pursue individual general partners to recover debts even after the partnership dissolves.

Legal filings to alert the state of dissolution may be required in certain states depending on laws. The Secretary of State is typically notified.

In summary, general partnership dissolution triggers winding up including asset distribution and liability payments. Partnerships fully terminate once the winding up process completes.

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Steps and options for terminating an LLC

State LLC laws define the requirements for properly terminating an LLC:

Members must first vote to dissolve the LLC, typically by a majority threshold outlined in the operating agreement. Unanimous consent may be required.

The LLC enters a wind-down period where managers (or members in member-managed LLCs) settle debts and distribute remaining assets.

Articles of dissolution are filed with the state along with certificate of cancellation once debts and assets are addressed. Some states have a time limit to file articles after voting to dissolve.

LLCs can also merge with another business entity or convert/reorganize into a new entity type as termination options. Specific legal steps apply.

Tax returns must be filed at federal and state levels for final year of LLC operations after termination vote and before completing state dissolution filings.

In essence, LLC termination involves member consent, settling outstanding debts/assets, filing articles of dissolution, and submitting final tax returns.

Regulations around asset liquidation and handling outstanding debts/claims

LLCs and partnerships follow similar asset and debt handling during dissolution:

Any outstanding partner loans must be repaid and partner capital accounts settled during the wind-down period after a partnership or LLC dissolves.

Assets get liquidated, and sale proceeds are distributed per ownership shares after settling all creditor debts and claims.

LLC operating agreements and partnership agreements often specify distribution priorities, such as whether capital repayments take precedence.

If debts exceed assets, creditors can still pursue general partners personally for repayment even after partnership dissolution. LLC members have liability protection.

LLCs provide more flexibility to structure buyouts of assets by members during the wind-down process. Partnership asset sales require partner approval.

Overall, asset and debt handling has many commonalities between partnerships and LLCs during dissolution. But liability exposure and buyout flexibility differ.

Comparing longevity and perpetuity of the two entities

LLCs generally have advantages in sustaining the business beyond the original founders compared to general partnerships:

LLC operating agreements can establish succession plans and restrictions on transfers to preserve the entity after owners depart. Partnership dissolution often automatically triggers when partners exit.

LLCs allow owners to withdraw or transfer interests typically without dissolving the entity. General partnerships dissolve by default if partners retire or pass away.

The liability shield of LLCs lowers risks of lawsuits or partner bankruptcy forcing dissolution. Partners are directly liable so partnership longevity is jeopardized.

LLCs permit flexible centralized management structures that support continuity despite owner departures. Partnerships lack centralized management ability.

Overall, the contractual flexibility, transferability restrictions, and liability protections make LLCs better equipped for long-term perpetuity beyond the original partners.

In essence, LLC structures allow more planning for continuity and succession to extend the entity’s lifespan compared to short-lived general partnerships.

Conclusion

LLCs and general partnerships have key differences in their legal protections, management structures, ownership flexibility, continuity planning, taxation, dissolution processes, and other aspects central to the business.

For real estate investments, general partnerships often suffice given joint control and straightforward taxation. 

But for operating businesses, LLCs better shield liability risks while permitting customized management and ownership rules fit for investors. LLCs require more formal compliance but enable continuity planning beyond original partners.

There is no universally superior entity type – the ideal structure depends on the specific business activities, risk profile, desired flexibility in operations and ownership, perpetuity goals, and other factors. 

But understanding the tradeoffs allows informed choices between general partnership and LLC models.

Both structures allow pass-through taxation and joint venturing, but statutory variations lead LLCs to better accommodate complex, long-term ventures with tailored ownership rules and liability protections. 

The comparison points covered in this guide illuminate key considerations around partnerships versus LLCs.

As we’ve unraveled the complexities of general partnerships vs. LLCs, one truth remains clear: in the evolving landscape of business, staying connected is paramount. 

Z Guide not only bridges the gap between professionals but also opens doors to invaluable insights and opportunities. In a world brimming with potential, ensure you’re never missing out on the synergy right around the corner. 

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