Partnership is a legal concept that defines the business association and personal relation between two or more persons who enter into a contract to engage in a commercial undertaking as co-owners. Although the definition of partnership differs in terms of form and substance, the concept is based on both common law and civil law. There are different types of partnerships. There are no formal state or federal filing requirements for general partnerships, but each partner shares liability claims, and may participate in management depending on partnership agreement.
Partnerships are created by enforcement of articles of partnership, a partnership agreement that describes partners’ rights. Although partnership agreement is not mandatory, the verity that different parties undertaking a commercial activity share profits and losses provides evidence of the existence of a partnership
A limited partnership refers to a form of partnership in which general partner(s) have obligations and powers similar to ordinary partnerships, and limited partner(s) have limited liabilities and no rights to participate in routine operations of the business.
The principle characteristics of partnerships include the existence of an oral or written agreement between competent persons, restriction on the maximum number of parties in the association, commonality of profit motive involving legal commercial or business undertakings, and the element of mutual trust, cooperation and confidence.
The main features of limited partnerships include existence of both limited and general partners, the limited partners are not fiduciaries, limited transfer of the interests of limited partners, no federal income tax and durability beyond the withdrawal of a partner in the unless a general partner withdraws in the absence of a contrary clause in the agreement.
Limited liability Company (LLC) refers to a business entity structured under state statue combining the features of limited liability corporations and those of partnerships. Generally, members file an operating agreement (articles of organization) to form LLCs. However, LLCs differ from partnerships because there is no restriction on the number of members or the membership of the LLC to an affiliated group. More importantly, members of LLCs may include foreign entities and corporations as well as individual parties. LLCs are taxed depending on the number of members. According to Internal Revenue Service, LLC may be treated as either partnership, corporation or as part of the LLC’s ‘owner’s tax return’ (IRS, 2012). Specifically, an LLC may not be considered for federal tax purposes if it files form 8832.
The primary features of LLCs include flexibility in how members want to be taxed, limited liability of members and existence of legal entity with rights and obligations separate from its members as well as possible termination upon the death of a partner.
The main characteristics of a corporation include limited liability for stockholders, unlimited life in consistency with the charter, existence of legal entity separate with rights and obligations separate from those of its members, and the flexibility in the transfer of interests (ownership rights).
Corporations are unique from LLCs and partnerships in that they exist to protect owners and shareholders from liabilities as opposed to LLCs, which offer limited protection to liabilities, and partnerships where at least one party carries the responsibility for debts. In corporations, profits are not subjected to taxes unlike partnerships, which are subject to taxes on salaries and profits and LLCs, which may be subject to self-employment taxes.
Corporations and LLCs share certain similarities including existence of separate legal entity or corporate structure, protection of personal assets, and protection against ‘double taxation’. Both corporations and LLCs have significant flexibility although corporations have greater flexibility
