If the LLC is treated as a corporation for income tax purposes, the LLC itself will be subject to tax at corporate rates, and generally no income will be taxed to its members unless distributions are made to them. If the LLC is treated as a partnership, it will file a partnership tax return but its income and deductions will be allocated and taxed to its members. Recently, the Internal Revenue Service provided guidance on how to classify LLCs as partnerships. An LLC will be the preferred entity only if it can be classified as a partnership. While an LLC is typically taxed as a partnership, there are some important differences between them.
General partnerships offer no protection from liabilities.
In limited partnerships, the general partner or partners are subject to unlimited liability. Moreover, if a limited partner substantially participates in the management of the limited partnership, he may risk being treated as a general partner and be exposed to unlimited liability. To achieve limited liability, limited partnerships are often structured by having the general partner be a corporation. However, such a structure may be too burdensome for a small business. Unlike limited partnerships, participation in management by members of an LLC does not expose them to personal liability.