If my friend and I are buying a 5 stake in a startup company, would it be better to go with an LLC or some kind of partnership agreement?

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If my friend and I are buying a 5 stake in a startup company, would it be better to go with an LLC or some kind of partnership agreement?

We’re both putting up half of the cash so we’ll share 50/50 in return on investment. We want to do it legally. Mainly for tax purposes.

Asked on July 24, 2017 under Business Law, Kentucky

Answers:

SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 3 years ago | Contributor

An LLC is almost always better, since as the term "limited liabiity company" implies, it will protect you from most business debts, judgments, obligations, or liabilities, so long as you do not personally guaranty them: thus, it will provide protection for your personal assets (e.g. home; money in personal bank accounts; etc.) if the business is sued for violating or breaching a contract or lease. (No protection is 100% perfect, but you are *much* safer with an LLC than a partnership.)
You can create an LLC that gives you the same tax treatment as a partnership--i.e. no "double taxation" with profits being taxed once at the business level and then again when distributed to the owners. Instead, as with a partnership, any profits or losses (losses provide tax deductions, by the way) will be attributed directly to the owners (called "members" for an LLC) and taxed as part of their personal income.


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