When starting a small business with a partner, you have to make a decision on what business structure you will assume. The obvious option is to form a partnership, but this may not be the most favorable choice for your business or for you. One route you can consider is to form an LLC.
According to the Small Business Association, a limited liability company is a hybrid of a partnership and corporation. An LLC offers you and your partner personal protection from the liabilities of the business. At the same time, it allows you to avoid corporate taxes.
The reason why you will not pay corporate tax rates with an LLC is that you pass profits and loss to your personal income taxes. You become an employee of the company and pay your own self-employment taxes, which allows you to write off any losses.
Another perk here is that you and your partner will receive set income from the business, which can help to ensure you both get paid. Sometimes it is easy to keep reinvesting the profits back into the business and forget to pay yourself, which is not a situation that you can maintain for too long.
Protection for personal property
If your business would face hardships and end up in debt and you are in a partnership, you and your partner could face creditors coming after your personal property to recoup the money the business owes them. When you create an LLC, the business becomes a separate entity. Creditors cannot come after you personally to collect on a debt.
This type of protection is important if you have assets you need to protect, such as your house. Keeping the line between your personal assets and business assets can make it a lot easier to manage the business as a separate entity, too, and avoid issues that happen when you mix personal and business finances.