Been slowly reading LLC or Corporation by Anthony Mancuso, not because I expect to form either soon, but because I’d like to one day and want to be prepared.
As I’m reading I’ll take notes, which serve to help me understand and might benefit some of you too. I encourage anyone interested in the material to pick up the book, which is excellent so far.
General Partnerships – 2 or more people, no limit legally, but it often leads to problems if you have a large # of people because of managerial disputes. You can designate someone as a managing partner, but doing so is risky because everyone is still personally liable.
You should create a written partnership agreement early to avoid complications later. A lawyer might cost $1K-$5K, but you can do it yourself using some free online tools.
Beware: all the general partners are liable for business debts. In bad cases, you and the partners might have to mortgage your house, sell your car, empty your bank accounts, sell your children (jk) and other nasty things. And this is regardless of what your % ownership – creditors can come after your shit regardless. So, General Parternships are risker than LLCs, corpoerations, and limited partnerships which offer at least some limited liabilities for the owners.
The tax burden passes through the partnership to each of the partners, who have to pay their fair share of taxes on their profits (on their individual income tax return). This is regardless of whether you choose to reinvest it or distribute it to the partners. That’s allocated profits vs distributed profits. Oh, and you have to pay self-employment taxes too. Each partner must fill out a IRS Form 1065 U.S. Partnership Return of Income and the partnership much give each partner a filled in IRS Schedule K-1 (Form 1065 (?)) Partner’s Share of Income, Credits, and Deductions which shows what proportion of profits or losses carry over their their 1040.
LLCs – Income tax passes through to the partners (like a partnership), but you have limited personal liability (hence the “LL” in “LLC”) for business debts. If you start making more $ than you need to take home you can convert LLC -> Corp so you’re taxed at a lower rate -or- you can have an “IRS Election” (?) to have the LLC taxed as a corporation, but it still stays an LLC. You can have one person for an LLC and don’t have to be a resident of the state where you form the LLC.
The owners aka members manage the LLC. In some cases, you can appoint a nonmember to manage the comapany’s affairs.
To form an LLC, it takes some paperwork (surprise!). You have to file a legal document called articles of organization with the state business filing office. If the LLC will have a presence in another state, you have to do even more.
You should prepare an operating agreement with the other members detailing how it will be owned, how the profits and losses will be split, how departing/dead members will be bought out, and other important things. If you don’t do this then your state’s default provisions will apply, which could get ugly. Create an operating agreement.
At this point, I don’t see why anyone wouldn’t form an LLC vs a General Partnership.
Next up… Corporations.