LLCs Compared to General Partnerships and Sole Proprietorships

Compared to general partnerships, and sole proprietorships LLCs offer the best benefits. Most partnerships and sole proprietorships switch to LLCs because they offer more advantages.

Advantages of an LLC

The main advantage an LLC has over general partnerships and sole proprietorships is limited liability. This gives business owners protection against current and future judgments or liabilities that may arise against the business. This means that you don’t have to incorporate your business. Sole proprietorships and general partnerships do not offer any liability protection. Business owners are personally liable for all debts of the business and liabilities. Another advantage of an LLC is that you are protected against creditors. Without it, creditors can go after business and personal assets.

Creditors

In a general partnership, creditors are allowed to seize all assets of any partner to pay the debts of that partnership. This includes bank accounts, real estate, cars, and other property. In an LLC even if the company goes bankrupt and you can lose your initial investment but your assets will be protected. Creditors cannot go after them. The drawback to a partnership is that if one partner has money that partner may have to pay any debts that the other partners accumulated. There are certain circumstances where the limited liability company will not protect a member from debt.

If a member guarantees a company debt signs a debt personally or does something that is negligent the LLC will not protect that member from that debt. But the limited liability company has to follow proper formalities. If proper formalities were not followed then the owners or officers may be held personally liable. Formalities include following the requirements of the law. In a sole proprietorship when the owner dies

Death

In a sole proprietorship when the owner dies any assets left behind of the business gets left to their heirs but the business will no longer exist. Even if the surviving spouse or other heirs decide to continue the business it must be in their name and the business will be considered a new business. Meaning that even if the spouse inherits all the assets from the business they will still have to start all over again from scratch. When it comes to a general partnership if one partner does it can cause the business to dissolve. In an LLC, the business continues.

Transferability

Another advantage an LLC has over sole proprietorship or general partnership is ease of transfer. Assets and accounts can be transferred by assignment of interest or stake in the company. In a sole proprietorship, each individual asset, accounts, licenses, and permits must be individually transferred. In a limited liability company, these items remain in the same company name. When it comes to certain things like credit lines new owners will have to submit personal applications.

Shared Ownership and Raising Capital

In an LLC the owner does not have to give up control in order to share profits. To do this the share of profits are set up to be separated from the share of ownership. You can make someone a member and they can have a share of the profits without giving them control over the company. Capital can be raised in a limited liability company by admitting new members or borrowing money. You can also raise money by selling shares. This does not mean you are giving up control by selling shares.

Other Advantages of an LLC

Separate bank accounts and records is another advantage an LLC has over a sole proprietorship. There is no confusion. In a sole proprietorship, this is not always the case. Ownership of the Company is more easily distributed in an LLC  than in a sole proprietorship or partnership. Control can be limited to those who are most capable. Beneficiaries can be given different percentages. That’s because in an LLC you can set up different classes of ownership, different levels of control and different distribution of profits.

Also forming your business as an LLC can give it a more prestigious image to potential clients or customers. Another added benefit is that the LLC has its own credit rating. If the LLC goes bankrupt this will not affect the owner’s credit. If the owner has bad credit this will not affect the limited liability company. But an LLC does have some disadvantages as well.

Disadvantages of an LLC

An LLC does cost a little more to operate than a sole proprietorship or partnership.  General partnerships and sole proprietorships don’t have annual fees or many start-up fees. The owner of an LLC would have to pay unemployment compensation for themselves. In a sole proprietorship, this is not the case. The LLC has to have its own records. Personal records of the owner must be kept separate from the business.

Looking to start a business or grow your current business? Contact FL Patel Law today by visiting our website or calling 727-279-5037.