Partnership vs Limited company: how to choose?

Understanding the benefits and differences between the two is crucial. 
This article is going to show you the benefits of partnerships and limited liability companies.  

What Is A Partnership And Limited Company? 

A partnership is a formal arrangement between two or more parties to do business and share profits. Liabilities and profits are shared equally in a general partnership while professional partners have limited liability. 

Assets and income of owners are separate from those of the company. Potential losses are limited to their stake in the company. A limited liability company is also known as a limited liability corporation (LLC). 

Differences Between A Partnership And Limited Company

The key differences between partnerships and limited liability companies include. 

Extent of Liability

All types of partnerships apart from a limited liability partnership have a member with unlimited liability. For limited companies, all members have liability limited to their stake in the company.

Owning Shares 

Partnership businesses don’t issue shares. Ownership of the business belongs to its partners. Shareholders who own a limited company don’t run it directly. Limited companies give out shares to shareholders.

Nature of Directors 

Owners in a partnership business are the primary decision makers who manage the venture. Alternatively, shareholders owning a limited company elect directors to handle the day-to-day activities. 

Necessary Documentation

Limited partnerships and limited liability partnerships need a certificate of limited partnership and limited liability partnership agreement. LLCs require articles of organization and an operating agreement. 

Taxation Requirements 

Each partner in a partnership pays income tax and national insurance on their share of profits. However, partners don’t pay corporation tax on their profits. It’s in fact limited companies that pay corporation tax on profits.

Benefits Of A Partnership 

There are several advantages of a partnership business, which are outlined below:

Never Work Alone

A partnership ensures that you don’t do all the work alone. You spend more time with loved ones or enjoying your hobbies if you have business partners. A partnership allows enjoying work life balance.

Access To Necessary Support

A partnership guarantees having someone to hold your back. Partners are a great source of strength and a wonderful solution when having bad days. Knowing that you have someone you’re working with eliminates stress that comes with growing a business.

Ready Cash To Grow

Most small businesses fail to grow because they lack capital to expand their operations. Partners can pool resources to grow the venture. The partners may have access to funds you may be lacking to expand. 

Sharing Losses

Partners share losses and profits. You don’t bear business costs alone. There’s sharing of capital expenditure in a partnership which allows partners to keep more personal funds. 

Varied Expertise 

Having partners allows gaining from their knowledge, experience, and expertise. All parties bridge gaps that may limit your business from growing. Partners solve problems with new perspectives to get things done. 

Benefits Of A Limited Company

Opting to structure your business as an LLC has significant benefits including:

Limited Liability 

Shareholders aren’t personally liable to company losses. The personal assets of members don’t such as homes and cars don’t get attached by company creditors. Owners’ liability is limited to share capital. 

Flexible Management

All owners take part in managing the business. Alternatively, the shareholders hire professional managers and directors with more experience to manage the company successfully. 

Pass Through Taxation On Profits

Profits go directly to shareholders in an LLC without getting taxed by the government. Members pay tax on their profit shares as their own income tax returns.

Easy To Start And Manage

Paperwork and fees to set up an LLC are light although requirements may vary by state. Anyone can handle the process seamlessly on their own although professional assistance makes the process easier. 

Disadvantages Of A Partnership And Limited Company

Although there are many positives, we’ve outlined some disadvantages of a partnership and limited company. They are:

Disadvantages of A Partnership 

• Unlimited liability to business debts
• Loss of autonomy  
• Lack of stability 
• Emotional conflicts 

Disadvantages of A Limited Company 

• Higher set up costs
• Disclosure of company information to the public
• Complex accounting requirements
• Strict withdrawal process 

Partnership Vs Limited Company: Which One Is Better To Choose? 

When planning to start or grow a business and there’s a skill or capital gap, getting a partner or partners is a great idea. The rule of thumb is to get someone who aligns with your business goals. 

An LLC offers simplicity, flexibility and tax advantages. Its most outstanding benefit is protection of members’ personal assets from business creditors. There’s no limit to the number of members in an LLC who contribute capital to manage the business. 

A partnership is easier and cheaper to establish and maintain. Both benefit from passing through taxation but LLCs have more flexibility. A business doesn’t have legal identity outside of the partners in a partnership.

Overall, choosing which business structure depends on business needs and personal preference.