What is a Partner in an LLC? Questions Answered
You may have heard some business owners refer to themselves as partners in an LLC. Really an LLC’s owners are called “members”, but your business can have multiple members. An LLC partner is just someone who has joined forces with another person or sometimes even a company to establish a business. If you’re new to business or just haven’t heard of an LLC, the abbreviation is for “Limited Liability Company”. It’s a popular business type that affords its owner(s) profit distribution flexibility and relatively informal requirements to manage the company. An LLC also provides owners liability protection so personal assets and funds are typically safe from lawsuits and tax seizures.
Since 2001, MyCompanyWorks has formed thousands of Single-Member and Partner LLCs across the United States. We have put together a quick outline of a partner’s role in an LLC, how a company is affected by partner-owners, and benefits and drawbacks to help you decide if a Partner LLC entity is right for your business. Also find resources to start your partner LLC today.
Definition of a Partner LLC
When two or more members form an LLC, they can be referred to as “partners”, but all individual owners of an LLC are officially called “members”. Partners in an LLC are the co-owners of the company. They have a stake in the business and share in the profits and losses, up to the amount of their investment. There can be more than one partner in an LLC, but at least one person needs to be appointed to oversee day-to-day operations of the company.
One of the main advantages of partner LLCs is that you can combine capital while protecting personal assets from business lawsuits. Liability is limited only to what is invested in the business.
Ownership flexibility is another key benefit since LLCs can be owned by US citizens, citizens abroad, other LLCs, or Corporations. An initial Operating Agreement should be drawn up at the start of business, but you’re not stuck with the same owners forever. An LLC Operating Agreement can be updated quickly to transfer ownership as needed.
TIP: An Operating Agreement should clearly define how ownership should be transferred in case of death, dismissal, and other circumstances affecting your business.
Get a free Operating Agreement with your new LLC
How does a Partner LLC differ from a Single-Member LLC?
A partner in an LLC is a person or entity that has invested with others in the same company. Some partners are silent and just provide capital with no involvement in the business. Other partners (members) are involved in the business by providing services and/or labor.
On the other hand, a single-member LLC is owned and managed by one person or entity. All the business responsibility and tax liability rest solely on that one member.
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How do multiple members benefit an LLC?
There are several benefits to having multiple members or owners of an LLC. Having silent partners who infuse your business with cash can be a low-cost option to borrow money without added restrictions and potentially higher interest rates from financial institutions. Many times investor members allow you to make all the major business decisions for the company, and just offer funding and expertise, so the actual “workers” are free to make major decisions and changes, as long as investing members sign off on legal documents.
Example: Let’s say you need a loan quickly, but you’re not able to meet a bank’s requirements for whatever reason. You can borrow from an investor partner and money can be transferred to your bank account as soon as the terms are worked out, instead of having to wait on lengthy loan approval processes.
Forming a Partner LLC also means there are potentially more hands on deck to handle management and operational tasks. Many members rely on other members to cover business while on vacation or in case of emergency. Many small businesses will add family members to LLCs to extend personal liability protections against loss of assets in case of a lawsuit or another member’s tax liability.
What are some disadvantages to Partner LLCs?
Higher formation costs
As with all limited liability companies, the cost to form an LLC can actually be more than forming a Corporation – however many entrepreneurs decide that the cost alone does not outweigh the benefits of the LLC business type.
Most Partner LLCs have lower costs in terms of tax filings and annual state reports, but formation costs can run up to $1,000 depending on what state you live in and the complexity of your business structure. You can check the cost of LLC formation in your state here. Just select LLC and your state for more information and to order your LLC online.
LLCs are less appealing to investors
Some consider LLCs as less attractive opportunities to investors. This can make it difficult to find interested investor-owners or apply for funding. LLCs are less appealing to investors because Unrelated Business Tax Income or UBTI can be generated through this business type, which means investor funding is at risk for being taxed at corporate rates. Most investors are looking for the highest yield on the lowest amount of investment, so being double-taxed at corporate rates consumes profits you wouldn’t otherwise lose.
Transferring ownership can be tricky
Without a well-defined Operating Agreement to spell out how members are dismissed, added, or replaced, how the company will handle closing the business, and what to do in case of a disagreement., transferring ownership can be a complex and lengthy process. If you didn’t track who invested what from the beginning, it can also be a challenge to determine the amount of equity and tax liability each member owns. For these reasons, many small businesses will go ahead and incorporate instead of starting an LLC.
Decide if a Partner LLC is right for your business
You can start a single-member LLC and be off and running with your new business. But can you run your business alone? Can you fund the business until it’s profitable? If you answered ‘no’ to either question, you may want to consider finding at least one partner to help you manage the business and give affordable access to funding. As long as you have a proper operating agreement in place, running a Partner LLC can be an effective way to protect personal assets while running a business with flexibility and less formality.
Conclusion
We’ve outlined the definition of a partner in an LLC and how a partner LLC works. Even if you operate as a one-man band, partners can help you with financing and offer advice and expertise. One of the reasons why the Limited Liability entity type is avoided is because it can cost more than forming a corporation and can be a challenge to find investors. And without a proper operating agreement, it can be messy to manage and transfer ownership.
Still wondering if a partner LLC is right for you? Our blog is loaded with resources to help you start and manage your company. If you need more professional guidance, our Vendor Network is an extensive list of qualified business partners to help you. Recommended Vendors in each category offer special pricing and promotions to MyCompanyWorks clients.
Contact us today to start your Partner LLC or find out how to manage your business in one place.
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