What is the difference between a Limited Liability Corporation( LLC) and a Partnership?
Tax Professional Answers
If you are a limited partner in Limited partnership, or are looking at forming a Limited Liability Partnership or LLP, consider a Limited Liability, Limited Partnership.With this form your liability is limited strictly to your investment and your personal assets are never at risk. Further, only the General partner can bind the organization and he too is also personally protected from liabilities. This form of partnership may not be available in all jurisdictions but provides the best protection in a partnership.
With an LLC you have the best protection possible and the best choice for tax purposes as well. You can never have any personal liability as an owner or partner of an LLC. LLC's are separate entities. Each one stands on its own and separate from any assets of the owners. Yet, it is not a corporation in the true sense. Corporations can issue stock, LLC's cannot. Ownership is limited to its members regardless of the country or state where it is formed.
The IRS recognizes the uniqueness of the LLC but since it is formed by a limited number of people, it initially suggests that it should be taxed as a partnership. But because of its very uniqueness, the IRS allows the LLC to be taxed as a corporation and as such the owners can choose to be either a C corp or an S corp. Also LLC ownership is set up by percentage not the number of shares owned. Control of the LLC's ownership percentages, sales of a partner's share, or the admittance of another partner due to the sale of one of the partners is controlled be an Organizational Agreement signed by the original organizers when the LLC is formed. It is similar to a partnership agreement.
Most owners choose to have their LLC's as an S corp as it allows any loses or gains to be passed through directly to their personal taxes as passive income on a Schedule E which is similar to a dividend and taxed at the regular income rate as are dividends, but because it is passive income, it avoids the payroll taxes (Social Security and Medicare) wage earners must pay..
If owners materially participate in the operation, they should receive a salary or wage as any employee would. That income would then be subject to payroll taxes like any non-owner employee. The level of pay the owner receives according to the IRS should be at a rate that is comparable to others in the same field of employment that are not owners. Such is not always the case and sometimes becomes subject to scrutiny by the IRS. That also can lead to additional tax, interest, and penalties.
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