Types of Companies > Limited Liability Company > LLC vs. Proprietorships & Partnerships

LLC vs. Proprietorships & Partnerships

How does an LLC compare to a sole proprietorship and partnership?

Advantages:

Owners are not personally responsible for company debts. This is the most important aspect of an LLC. In a sole proprietorship and partnership, the owners are personally responsible for the debts of the business. If the assets of the sole proprietorship or partnership cannot satisfy the debt, creditors can go after each owner's personal bank account, house, etc. to make up the difference. By contrast, if an LLC runs out of funds, the owners are usually off the hook.

Please note that under certain circumstances, an individual member may be liable for the debts of an LLC. These circumstances include:

• If a member personally guarantees a debt.
• If the LLC fails to have a separate bank account and personal funds are intermingled with LLC funds.
• If the LLC has minimal capitalization or minimal insurance.
• If the LLC fails to pay state taxes or otherwise violates state law.

Easier to raise money:
An LLC has many avenues to raise capital. It can admit new members by selling membership interests, and it can create new classes of membership interests with different voting or profit characteristics. Plus, investors will rest assured that they will not be personally liable for company debts.

Ease of transfer:
Ownership interests in a limited liability company may be sold to third parties without disturbing the continued operation of the business. The business of a sole proprietorship or partnership, on the other hand, cannot be sold whole; instead, each of its assets, licenses and permits must be individually transferred. New bank accounts and tax identification numbers are also required.

Disadvantages

Cost:
LLCs cost more to set up and run than a sole proprietorship or partnership. For example, there are the initial formation fees, filing fees and annual state fees. These costs are partially offset by lower insurance costs.

Formal organization:
Although an LLC requires less formalities than a corporation, there is still more paperwork involved than a sole proprietorship or partnership. A sole proprietorship or partnership can commence and operate without any formal organizing procedures; not even a hand written agreement is required.

Separate records:
In order to maintain the separate form of the LLC and maintain the liability protection of its members, the owners of the LLC must carefully maintain separate records and keep their personal business separate from the LLC's business. Even more importantly, the LLC's money should never be intermingled with personal money.

back to top