You have decided to venture out on your own and have started a new business, here in the Flathead Valley. Congratulations! With so much going on to get the business started, thinking about how to protect yourself may have inadvertently slid to the bottom of your list of things to do. Hopefully this will help you decide on which is the best option for you come the next tax season: a limited liability company (LLC) or a limited partnership (LP).
An LLC is a business structure that offers tax flexibility and operation efficiency. The owners of an LLC are called “members” and, according to Montana law, there can be one or more person to make up the LLC. The limited part of the name refers to personal protection each member receives from business decisions. With this, personal assets are legally protected, even if the company is sued or dissolves. An LLC is good choice for a single owner business or a small business owner.
An LLC needs a business name that is unique from any other existing LLCs in the state and doesn’t use words restricted by the state of Montana. Articles of incorporation include who the members are and the basic contact information. If there is more than one member, there needs to be an operating agreement which outlines percentages of ownership of the company. And, of course, licenses and/or permits will need to be applied for depending on the industry of the business. Lastly, there is an announcement of the LLC formation in a local publication.
Some advantages of an LLC are that there are no federal business taxes because the taxes are passed on to the members of the LLC. Assuming members follow the requirements of the LLC structure they are protected against personal liability. The fees to register an LLC are less than other types of businesses, which means startup costs are lower. There is more flexibility with an LLC and there are fewer profit-sharing restrictions.
Some disadvantages are that some states may dissolve the LLC if/when any member leaves, so a new LLC must be formed if the remaining members want to stay in business. Because the members of the LLC are not considered self-employed, they pay a higher self-employment tax on the entire net income of the LLC. Talk to a CPA to discuss tax consequences of income as a member of an LLC.
A Limited Partnership is the legal structure best known as a business with a “silent” partner. An LP has one general partner responsible for all management decisions and obligations, and an unlimited number of other “limited” partners who hold no voting or management responsibilities. LPs are only liable for what they invest into the company. There are beneficial for businesses that want to generate operating funds without giving up any other rights. They are also a great option for time-restricted projects like a movie production or real estate.
A Limited Partnership requires a limited partnership agreement rather than a limited liability partnership agreement. The registered agent is usually the general partner, and an LP requires a certificate of limited partnership. Worker’s compensation insurance may be required with a Limited Partnership.
Some advantages to a Limited Partnership are that personal assets are protected up to the limits of a partner’s investment. Like an LLC, taxes are passed on to partners rather than the business paying corporate taxes. The general partner has full oversight of the business, and more partners can be added as needed.
Some disadvantages of an LP are that partners pay self-employment taxes. Another major disadvantage is that limited partners don’t have a say in any business decision, which needs to be kept in mind, depending on if you are a partner or the general partner. Talk to a CPA to discuss tax consequences of income as a partner in an LP.
As you can see, any business can benefit from either the Limited Liability Company (LLC) or Limited Partnership (LP) format. If you are having a hard time deciding which model best fits your business, call and schedule an appointment with one of our lawyers to discuss your best option.