With so many business models to choose from, it can be difficult to select the right one. While LLC and a general partnership are similar in some ways, only one is right for your business.
Choosing the right business model for your business is one of the first steps you must take to start a business. If you’re starting the business with other people, then you’ll need to consider the various types of partnerships that are available to you. Two of the most common types are LLC (Limited Liability Company) and a general partnership.
What is a Partnership?
A partnership is when two or more people start a business together, though it isn’t restricted to just a couple of people; you can have as many as you like. Not everyone has to hold the same responsibilities, so it’s possible for some partners to merely be investors, while others may be more active in the business.
There are a number of pros to working in a partnership:
- Spread out the responsibilities
- Shared start-up capital
- One person can replace the other in the event of illness or death
- Everyone motivates each other
- Complimentary skills
However, there are also some cons when it comes to forming partnerships:
- Increased risk if one partner is untrustworthy or unstable
- Shared control can be difficult
- Shared profits
- Friendships may be destroyed by a partnership if things go wrong
It’s important to look at the cons when planning a business with a partner or two. Keep in mind that there are risks you may face if someone else makes a mistake. For example, if one of the other partners puts the business into debt, you could be liable for the debt, even though you didn’t personally incur it.
When deciding whether or not to form a partnership, you need to think about how well you work with the other partners and whether they have the same work ethic that you do, or not. Personalities need to mesh well, too, since it usually doesn’t work to have two very strong willed people trying to make business decisions.
In a general partnership, all partners are equally responsible for everything that happens in the business and they share equal profits. While the ideal is to have everyone contribute the same amount of money and skills, that rarely works as planned. In some partnerships, one person will have the money while the other has the skills to make the business work. You can have unlimited people in a partnership, but the more involved, the more difficult it will be to come to a decision even on the simplest things.
When it comes to taxes, a partnership is unique in that the partners become “pass through entities.” That is, the taxes owed on the business can be paid through their individual tax returns or through joint tax returns.
Limited Liability Company
Not all partnerships involve the same levels of risk and a limited liability company is a good option if you have some partners who will only be contributing money and do not want to be a part of the decision making process. These are essentially silent partners, putting in the money, reaping part of the profits, but staying out of the actual business decisions. Keep in mind that it is also possible to set up an LLC with just one person.
When more than one person is involved in an LLC, you can set it up so that one person is in charge of things and will take on the risks of the business. The remaining partners can be there in name only, providing start-up capital, but not taking part in the actual business decisions, as well. This is a choice that needs to be made when forming the company, since some people may prefer to remain in the background and others will want to take more risk and responsibility.
Which Option to Choose
When deciding which business model to go with, you have to look at what will work best for the people involved. Does everyone agree to share the responsibilities and risks equally? Or do they want one person to handle most of the work?
Once a decision has been reached, you will need a business agreement to make sure that everyone is in accord, in writing. You will also need to include specifics for getting out of the business in the future. If someone dies, does the remaining partner receive their part of the business, or is it turned over to family? Start with a good boilerplate agreement and work it to fit the specific situation.
Running a business can be complicated and often, it’s helpful to have someone else to help out. A partnership can be very useful, but it may also be more restrictive than you like, so an LLC may be your preferred option. Take some time to consider all options and make the best decision for you, as it will affect a large part of your life for the foreseeable future.
Photo courtesy of paul (dex) via Flickr