One of the most significant differences between an LLC and a partnership is the ability to limit your liability. An LLC is its own, independent entity, with an existence that is separate from the owners. A partnership is more like a collective of individuals. If an LLC is sued, generally, that doesn’t affect the owners individually. But if a partnership is sued, usually, the partners are named individually. In short, if you’re in a partnership, you and your personal assets are "exposed." That’s not the case with an LLC.

As part of your analysis regarding which is the right type of entity for your business, you’ll want to weigh your risk tolerance for liability, and the extent to which you can withstand a lawsuit "hit." You’ll also want carefully to consider your longer-term goals for the company -- if you want a company you can eventually sell, you’ll need a formal entity, such as an LLC or a corporation. Finally, different entities pay taxes at different rates, so you’ll want to run some pro forma projections to see which tax regime serves you best. A qualified business attorney and a small-business accountant can help you weigh the pros and cons and other issues to reach the decision that’s right for you.