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Why is it better to do business as an LLC and not as a Partnership

Marina Del Rey, CA |

Please let me know
asap as I may become a partner with my fiance on his existing business where he is the sole proprietor. Also What are the TAX advantages of a partnership and downfalls and the same what are the tax advantages for a LLC and disadvantages. If we own a clothing boutique that has some existing debts but is profitable and we are thinking about opening more boutiques in the future what is best a LLC, Partnership or S corp and WHY?

THANKS!

Attorney Answers 2

Posted

To answer your specific questions, LLCs are separate legal entities, and if you maintain them as they're supposed to be maintained, they create a corporate shield that protects your personal assets from being reached by people who sue your LLC. Partnerships, on the other hand, when they're sued, have no such corporate shield, and the individual partners are liable. The tax treatment is similar, in both cases, there is single "pass through" taxation. Either way, you should have a written agreement that specifis how your entity will operate, how you will divide responsibilities and profits, what you'll do if you want to add a partner/member or remove one, etc. etc.

There are lots of considerations in deciding what business entity to form, too much to cover in an Avvo answer, and requiring too much information you haven't supplied. Some of the considerations depends on your individual asset and tax situations, your collective asset, trust, and tax situation, the condition of the existing businessa and how or when it might expand, etc., etc. This is a decision you should only make after consulting with a business lawyer and a CPA after full disclosure.

Disclaimer: Please note that this answer does not constitute legal advice, and should not be relied on, since each state has different laws, each situation is fact specific, and it is impossible to evaluate a legal problem without a comprehensive consultation and review of all the facts and documents at issue. This answer does not create an attorney-client relationship.

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Posted

As stated by the previous attorney, there are too many factors that must be considered when deciding what, if any, business entity to form.

Typically, however, if you do not have any assets (savings outside an IRA or 401(k)) and if you do not own a home, you can operate as a partnership since you have few, if any, assets to protect. However, if you choose to operate as a partnership you would be well advised to have a formal agreement prepared that contains an exit strategy and a milestone that if reached the partners then agree to incorporate their business.

As to whether an LLC, or Corporation, would better suit a particular individual's needs, the answer depends on a multitude of factors, but generally in California the corporation (with a buy-sell agreement if multiple shareholders are involved) is a better vehicle from which to operate a business, while an LLC is best to hold and operate real estate holdings.

For more information on LLCs, Partnerships, and Corporations, please visit my website at www.yourlegalcorner.com

Disclaimer. Ms. Marsh is an attorney licensed to practice in California. The information posted above is for general information, does not constitute professional legal advice, and does not create an attorney client relationship. Ms. Marsh strongly advises the questioner to consult with an attorney to thoroughly review his or her particular circumstances and for advice tailored to his or her specific circumstances.

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