When starting a business, one of the most important decisions you can make is determining the right business structure. It’s essential that you understand the differences between each type before making a decision – from how to form an LLC to the pros of a partnership, we took a closer look at both options to help you make the right choice.
Partnerships
Partnerships are one of the oldest and simplest business entities. They are formed when two or more people agree to come together to form a business. Partnerships can be either general or limited, which means that each partner has an equal share of ownership and responsibility for the business’s debts, profits, and other obligations.
Advantages of Partnerships
There are a number of advantages to opting for a partnership model, and these include:
Easy funding
Funding can be one of the biggest hurdles entrepreneurs face when starting a new venture. Partnerships offer an advantage by making it easy to acquire funds since two or more people contribute financially to the business. This makes it much easier to acquire startup capital than if you were to pursue funding on your own as a sole proprietor or corporation.
Division of work
One major benefit of partnering up with someone is having someone else shoulder some of the responsibility and workload. This division of labour also allows for better specialisation in certain areas compared to firms run completely by just one individual in charge.
Better decisions
People make better decisions when consulting with others than when making decisions alone, as more perspectives are taken into account within group conversations. The collective experience between partners gives them an extra edge over competitors who are not availing themselves of their varied expertise and knowledge bases from different industry backgrounds.
Downsides of Partnerships
As with any business decision, it is important to be aware of the potential risks of partnerships, and these can include:
Potential Liability Issues
When you start a partnership with someone else, you are jointly responsible for any debts or liabilities associated with the business. This means that if one partner defaults on payment or misrepresents the company through its marketing activities, each partner will be held accountable for any legal action taken against them.
Lack of control over partner activities
Put simply, partners lack control over what their counterparts do within the partnership – unless those activities are written into an agreement beforehand that outlines exactly what’s expected from each party involved in regard to specific tasks and duties. This can make decision-making a long, tricky process.
Setting up a partnership
If you have decided to set up a partnership, you will simply need to register with HMRC, making this a fast, simple option.
What Is An LLC?
A limited liability company (LLC) – more commonly known as a private limited company (Ltd) in the UK – is a type of business entity in which members have limited personal liability for the actions and debts of the company.
Unlike a partnership, LLCs are owned by one or more individuals who act as managers and make all major business decisions. The owners of an LLC are not personally responsible for any debt or obligations incurred by the company, meaning their personal assets are not at risk.
Advantages of LLCs
There are a number of advantages to forming an LLC, including:
Protection of personal assets
Owners of LLCs have limited liability protection, meaning their personal assets are protected from any debts or lawsuits incurred by the business. If the company goes bankrupt or is sued, owners will not be held personally liable for any resulting losses.
Tax benefits
LLCs are treated differently from corporations when it comes to taxation, as they are eligible to pay Corporation tax at a rate of 19%. Owners can also withdraw a small salary and have profits paid as dividends, which, unlike salaries, are exempt from National Insurance Contributions (NICs).
Flexibility
Unlike partnerships, LLCs enjoy more flexibility when it comes to decision-making, as the owners are in control and do not need to consult with partners before making any changes.
Disadvantages of LLCs
As with partnerships, LLCs also have certain drawbacks that should be taken into account when deciding if this is the right business structure for you:
Costs and complexity
Setting up an LLC can be more complex than a partnership; limited companies must typically file formation paperwork with HMRC and register with Companies House, and this can be a drawn-out process.
Limited life span
Unlike corporations, LLCs have a limited lifespan and will be dissolved once the owners decide to terminate or sell the business. This means that if an owner dies or leaves the company then it may no longer be able to continue operations.
Which Is the Best Option For My Business?
Choosing the best business structure for you ultimately depends on your individual needs and goals. If you are looking for personal asset protection, then an LLC may be the best option. However, if you are looking for more flexibility in decision-making, then a partnership may be the better choice.
Ultimately it is important to consider both options carefully before making a decision so that you can choose the right business structure for your business.
Final Thoughts
When deciding between a partnership and an LLC, it is important to consider both options carefully and weigh the pros and cons of each. By doing so, you can make an informed decision about which business structure will best suit your needs. Ultimately, the best option for you will depend on your individual goals and objectives for your business.