During a business startup, you must choose a business structure.
You could opt to go solo and start a sole proprietorship, partner up with someone and create a partnership, or even go big and form a limited liability company or a corporation.
All these structures have their pros and cons, but in this article, our focus is on partnerships and corporations.
Continue reading to learn the difference between a partnership and corporation.
What’s a Partnership?
When two or more people come together to establish a business, the resulting venture is a partnership.
There are two types of partnerships: general partnership and limited partnership.
In a general partnership, al the partners have equal ownership of the business. As such, they’re equally entitled to the business’ profits and equally liable to the business’ losses and debts.
In a limited partnership, some partners (limited partners) have no say in the operations of the business. Technically, they’re investors, and their liability is limited to the capital they originally invested.
What’s a Corporation?
A corporation is an independent legal entity. It’s separate from its owners.
There are two types of corporations: an S corporation and C corporation.
The Difference Between a Partnership and Corporation
Now that you have a clear picture of these two business structures, let’s dive into what sets them apart.
Formation Requirements
When creating a partnership, you just need to find a business name, draw up a partnership agreement, and file the documents with a local or state office.
On the other hand, there are a lot more processes involved in forming a corporation. You must start by finding a business name that meets your state’s corporation naming rules, and then appoint directors. Next, just like you would need articles of organization when you create an LLC, a corporation requires articles of incorporation.
Other important steps include:
- Paying filing fees
- Creating corporate bylaws
- Holding the initial meeting of the board of directors
- Issuing stock certificates to shareholders.
Clearly, forming a corporation requires professional know-how. While you can create a partnership without getting any help, you might need an incorporation specialist to help you form a corporation.
Protection from Personal Liability
In a partnership, partners have some level of personal liability, depending on whether they’re general partners or limited partners.
As a general partner, you’re wholly liable to the debts and losses of the business. The business’ creditors can come after your personal assets. And as a limited partner, you stand to lose the capital you invested.
When you form a corporation, you get the strongest protection from personal liability. Under the law, the corporation is an independent entity. Nobody will come after your personal assets if the corporation incurs debt it can’t pay.
Taxation
In a partnership, income is taxed on a personal level. This means the business won’t pay any income taxes.
In a corporation, particularly a C corp, there’s double taxation. The business will pay a corporation tax and the owners/shareholders will pay income tax as well.
You can create an S corp to avoid double taxation, but this structure is limited to U.S. citizens and it can’t have more than 100 shareholders.
Have Your Pick
Now that you know the difference between a partnership and corporation, which structure will you pick? Both have pros and cons, but it all depends on the nature of your business and the level of personal liability you’re willing to assume.
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