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Choosing between a partnership and an LLC

You and your partners are ready to get your new business venture off the ground. Before you can do so, you need to choose an entity structure that will best serve the company and everyone involved.

If you are like many other Alabama entrepreneurs, you may have already narrowed down your selection to two different entities. Now all you need to do is understand the primary advantages and disadvantages of each in order to make an informed decision.

Some information regarding a limited liability company

The limited liability company structure represents a combination of a partnership and a corporation. Many small companies believe it to provide the best of both worlds, but for you, it remains to be seen. The advantages and disadvantages of this entity structure include the following:

  • The personal assets of the members are protected from liability should the LLC get into legal trouble.
  • An LLC does not require the same amount of paperwork and structure as a corporation.
  • An LLC does require more paperwork and structure than a partnership.
  • An LLC’s taxes pass through to the members. This means that the same monies are only taxed once.
  • You will need more capital to get an LLC up and running than it would take to establish a partnership.

The LLC’s operating agreement will outline the rights and responsibilities of each member. Many people believe that the pros outweigh the cons, but you will need to make that decision for yourself.

Some information regarding a general partnership

In this entity structure, each partner contributes money to the business. Each partner participates in making decisions for the business and in its operation. The goal would entail best utilizing the strengths of each partner to make the business a success. Sounds good, but this type of entity does come with some good points and some bad ones:

  • The partners share profits in proportion to their contributions.
  • Each partner bears 100 percent of the liability for the partnership.
  • The formation process is short.
  • Each partner bears the tax burden of the profits.
  • Each partner can voice opinions before making any final decisions.
  • The decision-making process does not necessarily require a meeting of any kind. Informal communications should suffice.
  • Disputes and personality conflicts among partners could derail business efforts.

It might be a good idea to enter into a partnership agreement to formalize your business arrangements with the other partners. Since you are literally risking everything you and the business have, you need all of the protections you can get.

You may need to take a more in depth look at each of these entities before making a final decision, but at least you now know what the main benefits and drawbacks of each entity entail. You could obtain additional information if needed.