Start Here: 5 Things You MUST Know
An LLC combines corporate-style limited liability with partnership-style pass-through taxation and minimal formalities
In a limited partnership, limited partners who participate in management may LOSE their liability protection
An LLP shields partners from other partners' malpractice — popular with law and accounting firms
LLC members can ALL manage (member-managed) or appoint managers (manager-managed) — unlike limited partnerships
Unincorporated associations (clubs, unions, churches) have NO separate legal identity — members may be personally liable
1. Limited Liability Companies (LLCs)
LLC = The Best of Both Worlds
A hybrid business entity that combines corporate-style limited liability with partnership-style tax flexibility. Members' personal assets are protected from business debts, while profits pass through to personal tax returns without "double taxation." LLCs have become the #1 choice for new businesses because of this combination.
LLC Formation
File Articles of Organization
Also called a Certificate of Formation. Filed with the state to create the LLC.
Create Operating Agreement
The internal rulebook: member rights, profit sharing, management structure, what happens if a member leaves.
Pay State Filing Fees
Fees vary by state. Far fewer formalities than corporations — no required annual meetings, no board of directors.
Management Structure
Member-Managed
ALL members participate in running the business. Each member has authority to bind the LLC in ordinary business.
Best for: Small businesses where all owners are actively involved. Example: Three friends open a restaurant as an LLC and all three make decisions together.
Manager-Managed
Members appoint one or more managers (who may or may not be members) to run the business. Non-manager members are passive investors.
Best for: Larger LLCs or those with passive investors. Example: A real estate LLC with 10 investors appoints one member as manager for day-to-day operations.
Single-Member LLCs
An LLC with only one owner. Provides liability protection while being treated as a "disregarded entity" for federal taxes (reported on Schedule C). Courts are more willing to pierce the veil of single-member LLCs if the owner does not maintain separation between personal and business finances. Commingling funds is the #1 risk.
LLC Tax Flexibility
LLCs can choose how they are taxed — no other entity type offers this range:
1 Member (Default)
Disregarded entity — taxed as sole proprietorship
2+ Members (Default)
Taxed as partnership — pass-through to members
Elective
Can elect S-Corp or C-Corp taxation (IRS Form 8832)
Real-World Scenario: LLC Liability Protection
The Setup: Maria forms "Maria's Bakery LLC" with a separate bank account, operating agreement, and adequate capitalization. A customer slips on a wet floor and suffers a broken hip.
What Happens: The customer sues and wins a $500,000 judgment. Maria's Bakery LLC only has $100,000 in assets.
The Result: The customer collects $100,000 from the LLC's assets, but Maria's personal assets (home, car, savings) are protected. The customer cannot go after Maria personally — because she properly maintained the LLC as a separate entity.
2. LLC vs. Other Entities
| Feature | LLC | Corporation | General Partnership | Limited Partnership |
|---|---|---|---|---|
| Liability | Limited for ALL members | Limited for stockholders | UNLIMITED for all partners | General = unlimited; Limited = limited |
| Tax | Pass-through (default) or elective | Double taxation (C-Corp) | Pass-through | Pass-through |
| Formalities | Minimal | Board, meetings, minutes required | None required | Filing required |
| Management | Flexible (member or manager) | Board + officers | All partners | Limited partners CANNOT manage |
3. Limited Partnerships
Limited Partnership
Has at least one general partner (unlimited liability, runs the business) and one or more limited partners (liability limited to their investment, passive investors). Must file a certificate with the state (unlike general partnerships).
General Partner
- Unlimited personal liability
- Runs the day-to-day business
- Makes management decisions
- Can bind the partnership
Limited Partner
- Liability limited to investment
- Passive investor only
- CANNOT participate in management
- If they manage, they may LOSE limited liability
Best Suited For
Temporary enterprises requiring large amounts of capital with general partners who are good managers. Common in real estate development, film production, and private equity.
Real-World Scenario: Limited Partner Loses Protection
The Setup: A real estate limited partnership has one general partner (the developer) and five limited partners (investors). Limited Partner Lisa starts attending every meeting, signing contracts with subcontractors, and making design decisions.
What Happens: A subcontractor is injured on the job site and sues the partnership. The general partner's assets are insufficient to cover the $1 million judgment.
The Result: Lisa may be treated as a general partner because she actively participated in management. Her personal assets are now at risk. The other four limited partners who stayed passive retain their limited liability protection.
4. Limited Liability Partnerships (LLPs)
LLP = Partnership with Malpractice Shield
A general partnership where partners have limited liability for the wrongful acts of OTHER partners. Each partner is still personally liable for their own malpractice, but they are shielded from liability for other partners' negligence. Partnership assets remain at risk for all claims.
Real-World Scenario: LLP in Action
The Setup: Three accountants — Amy, Ben, and Carol — form an LLP. Ben commits malpractice by failing to detect a client's fraud, causing the client's investors $2 million in losses.
What Happens: The investors sue the LLP and all three partners.
The Result: Ben is personally liable for his own malpractice. Amy and Carol's personal assets are protected — the LLP structure shields them from Ben's wrongful acts. However, the partnership's assets (firm bank accounts, equipment) ARE still at risk.
Why LLPs Are Popular with Professional Firms
Law firms and accounting firms love LLPs because professionals can all participate in management (unlike limited partnerships) while being shielded from each other's malpractice (unlike general partnerships). It is the best of both worlds for professional practices.
5. Joint Ventures
Joint Venture
A partnership-like arrangement for a SINGLE business transaction or project, not an ongoing business. The same legal rules as partnerships apply, but the scope is limited to the specific venture.
Real-World Scenario: Joint Venture
The Setup: A construction company and an architecture firm form a joint venture to build a single office tower. They agree to split costs and profits 60/40.
What Happens: During construction, a worker is injured due to negligence by the construction company's crew.
The Result: Both the construction company and the architecture firm can be held liable for the worker's injuries — the same joint and several liability rules apply as in a partnership. After the project is complete, the joint venture dissolves.
6. Unincorporated Associations
No Separate Legal Identity
A group of people joined for a common purpose other than making a profit. Unlike corporations and LLCs, unincorporated associations do NOT have a separate legal identity. Members may be personally liable for the association's debts.
Six Types
Trade Associations
Industry groups that represent businesses in a sector
Labor Unions
Organizations representing workers' interests
Benevolent & Fraternal
Elks, Rotary, fraternal orders
Religious Organizations
Churches, temples, religious groups
Clubs
Social clubs, country clubs
Condo Owners' Associations
HOAs and condo associations
Key Difference from Corps/LLCs
Members of unincorporated associations may be personally liable for the association's debts and obligations, depending on state law. This is a KEY distinction from corporations and LLCs where owners enjoy limited liability.
Cheat Sheet
Print this page for quick referenceLLC
- Limited liability + pass-through tax
- File Articles of Organization
- Operating Agreement = internal rulebook
- Member-managed OR manager-managed
- Single-member = disregarded entity (Schedule C)
- Can elect S-Corp or C-Corp tax treatment
Limited Partnership
- General partner = unlimited liability + management
- Limited partner = limited liability + passive only
- Limited partner who manages may LOSE protection
- Must file certificate with state
LLP & Other
- LLP: shielded from other partners' malpractice
- LLP: own malpractice = still personally liable
- Joint venture = partnership for single project
- Unincorporated associations: no separate legal identity
Exam Trap Alerts
1. Limited Partner Managing = Losing Protection
In a limited partnership, a limited partner who participates in management may be treated as a general partner and LOSE their limited liability. This is a huge exam topic. LLCs do NOT have this problem — all members can manage without losing protection.
2. LLC vs. Limited Partnership on Management
The KEY advantage of LLCs over limited partnerships is that ALL LLC members can participate in management without losing liability protection. In a limited partnership, only the general partner can manage.
3. LLP = Malpractice Shield Only
In an LLP, you are shielded from other partners' wrongful acts, but partnership assets are STILL at risk. It is not total protection. And you are ALWAYS liable for your own malpractice.
4. Single-Member LLC Veil Piercing
Courts are MORE willing to pierce the veil of single-member LLCs. The #1 reason: commingling personal and business funds. Always keep a separate bank account!
5. Joint Venture = Partnership Rules
A joint venture follows the same liability rules as a partnership (including joint and several liability for torts), but it is limited to a single project or transaction. Do not confuse it with a limited partnership.
6. Unincorporated Associations = Personal Liability Risk
Unlike corporations and LLCs, unincorporated associations do NOT have separate legal identity. Members may be personally liable, depending on state law. This includes clubs, unions, and HOAs.
Quick Reference Summary
LLC
Limited liability + pass-through tax + flexible management. #1 entity choice today.
Operating Agreement
LLC's internal rulebook: member rights, profits, management, exit terms.
Limited Partnership
General partner manages (unlimited liability). Limited partners invest only (limited liability).
LLP
Partners shielded from each other's malpractice. Popular with professional firms.
Joint Venture
Partnership for a single project. Same liability rules as general partnership.
Unincorporated Association
No separate legal identity. Members may be personally liable. Includes clubs, unions, HOAs.