How to Set Up A Partnership LLC? (Easy-To-Follow Steps)

Jon Morgan
Published by Jon Morgan | Co-Founder & Chief Editor
Last updated: June 20, 2024
FACT CHECKED by Lou Viveros, Growth & Transition Advisor
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If you are considering starting a business, you could structure the company in several ways. Setting up a partnership LLC is one of the ways, and this entails specific steps, including the submission of legal documents and compliance with state laws.

As an expert in the business industry, I have gained extensive knowledge through years of practice dealing with LLC owners regarding their concerns about their business entities.

After in-depth research and legal consultation with our team of Venture Smarter legal experts, I’ll provide you with a step-by-step guide on how to set up a partnership LLC.

Quick Summary:

  • To set up a partnership LLC, you need to decide on a business name, create and file articles of organization, draft an operating agreement, and register with the IRS.
  • An LLP protects the personal assets of each member from the losses, debts, or obligations of the company, as well as any infractions committed by other partners.
  • Limited partnerships represented 9.9% of all partnerships in 2021, but they reported 28% of the profits and had the largest share of partners (34.9%).
  • The flexibility and protection offered by a partnership LLC make it an excellent choice for entrepreneurs looking to minimize personal risk while benefiting from the collaborative potential of a partnership.


How To Set Up A Partnership LLC

To set up a partnership LLC, you should comply with state requirements, create an LLC operating agreement, and submit all legal documents. Consult a law firm to help you with the process.

Based on our experience at Venture Smarter in setting up partnership LLCs, the steps include the following:

  1. You must first decide on a business name, then verify if it is available with the Secretary of State’s office.
  2. Create and file articles of organization with the Secretary of State's office to register the business entity. The document should contain all information required by the state, such as the approved business name, physical address, registered agent, purpose, and the members of the LLC.
  3. Create an LLC operating agreement that will outline the partnership's structure and management. The document serves as a legal contract between partners and indicates the bylaws of the company.
  4. Your company must be registered with the Internal Revenue Service (IRS). You can do so by submitting business tax forms and obtaining a Federal Employer Identification Number (EIN) [1].

What is an LLP and How Does It Work?

An LLP is a business structure in which the liability of each partner is limited to the capital or ownership interest they hold within the company and may not be personally liable for any debts owed by the company [2].

Partnership interests can be held by individuals, corporations, or other LLCs.

From my experience, the beauty of an LLP was in the protection it offered. An LLP, or limited liability partnership, is a legal entity that provides business owners with the protections of a corporation while still offering the pass-through taxation benefits of a general partnership.

This type of legal entity can be advantageous for businesses looking to limit their personal financial liability from legal actions, debts, or losses incurred by the company.

The business format works by compounding individual expertise, establishing balanced and distributed labor, as well as isolating liability.

Partnerships can be structured with or without an LLC Operating Agreement. However, it is advisable to draft one since it discusses and outlines how the business will operate.

“It’s rare to find a business partner who’s selfless. If you’re lucky it happens once in a lifetime.”

– Michael Eisner, former CEO of The Walt Disney Company

What is the Difference Between a Limited Liability Company and a Partnership?

The primary difference between a limited liability company and a partnership involves the extent of liability one partner or member is responsible for.

According to my findings, in an LLC, the members are not personally liable for the company’s financial obligations. They are also exempt from any business debts or losses incurred by other members of the company.

In a standard partnership, any liability incurred by one partner must be accounted for and settled by the other business owners.

Which is Better, A Partnership or An LLC?

Shaking hands in front of dozen members

An LLC is a better option than a partnership since the liabilities of each individual member are isolated and protected from any debts or obligations incurred by the other partners.

The best option for your business depends on what you are trying to accomplish. If the goal is to offer protection from liability and have a pass-through taxation structure, then an LLC would be a better business entity.

Reflecting their growing popularity, LLCs accounted for 71.7% of all partnership returns filed in the U.S. in 2021, dominating the field for the 20th consecutive year [3].

Additionally, LLCs represented 25.5% of total partnership profits, marking a significant 23.1% increase from 2019, illustrating their vital role in the business landscape.

Related Article: LLC vs Limited Partnership

Taxes on Partnerships and LLCs

Partnerships and LLCs are both pass-through entities for tax purposes.

The pass-through entity structure means that our clients at Venture Smarter can report the business's income and losses on their personal tax returns.

There is no separate entity-level tax return for a partnership or LLC.

In other words, the partnership or Limited Liability Company itself does not pay taxes. Instead, the profits and losses are reported on the tax returns of individual partners or members.

That being said, the tax implications for partnership LLCs can vary significantly from one state to another. Some states impose an income tax on LLCs, while others may have a franchise tax or a capital value tax.

Additionally, local taxes may apply. It's essential to understand the specific requirements and opportunities in your state and locality, including any credits or incentives for small businesses or specific industries.

FAQs

Is Having a Business Partner a Good Idea for an LLC?

Having a business partner is a good idea for an LLC since a multi-member LLC would provide additional capital, lessen the risk, and distribute the labor.

How Do LLC Partners Get Paid?

LLC partners get paid based on their ownership percentage in the company. The operating agreement outlines how profits and losses are distributed among partners and what happens should one partner want to leave the business of the multi-member LLC.

Who Is Responsible for Liabilities and Business Debts if a General Partnership Fails?

All partners are responsible for liabilities and business debts if a general partnership fails. Consult the operating agreement to avoid disputes among partners. If a partner withdraws from the multi-member LLC, they are still liable for any obligations incurred by the company before their departure.

Does a Partnership LLC Need to Hold Annual Meetings?

A partnership LLC does not need to hold annual meetings since it is not legally required. However, periodic meetings can facilitate better communication and decision-making among members.

Reference:

  1. https://www.irs.gov/businesses/small-businesses-self-employed/apply-for-an-employer-identification-number-ein-online
  2. https://www.investopedia.com/articles/investing/090214/limited-liability-partnership-llp-basics.asp
  3. https://www.irs.gov/pub/irs-soi/soi-a-copa-id2305.pdf

About The Author

Co-Founder & Chief Editor
Jon Morgan, MBA, LLM, has over ten years of experience growing startups and currently serves as CEO and Editor-in-Chief of Venture Smarter. Educated at UC Davis and Harvard, he offers deeply informed guidance. Beyond work, he enjoys spending time with family, his poodle Sophie, and learning Spanish.
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Growth & Transition Advisor
LJ Viveros has 40 years of experience in founding and scaling businesses, including a significant sale to Logitech. He has led Market Solutions LLC since 1999, focusing on strategic transitions for global brands. A graduate of Saint Mary’s College in Communications, LJ is also a distinguished Matsushita Executive alumnus.
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