If you wish to start your own business, but aren’t sure which type you should register as, this article may serve as a guideline. Deciding on partnership vs. corporation can be crucial for your success.
Do you want to start small and work your way up? Or perhaps you have investors lined up and are ready to start a corporation?
Either way, let’s dive into the nitty-gritty of this article!
What’s a Partnership?
The partnership is a business model where the control and responsibility are in the hands of several people. It’s relatively easy to establish.
Basically, if you and multiple other people decide to start a business together, that by default can become a partnership.
The partnership does not file taxes in the name of the company. The owners have to report their income and loss on their personal tax forms. This means each owner is responsible for their own part.
Types of Partnerships
When you consider partnership vs. corporation, keep in mind that there are layers to each side.
The most common partnership is a general partnership, also known as a GP. All obligations the business makes have to be fulfilled by the owners.
They’ll also be liable for any debts. This means if there’s an accident or loss of funds, each owner has to cover the expenses themselves.
Limited partnership, abbreviated as LP, introduces two types of partners. Some general partners have similar responsibilities as the general partnership owners.
They’re in charge of everyday business decisions and are liable to the company’s name.
Limited partners are considered as investors. They bring money to the business but do not take part in everyday decision making.
They may also be liable for any loss or obligation. But their liability is calculated according to the size of their investment.
The last type is the limited liability partnership (LLP). It’s more specialized than the previous models and is often associated with legal, medical, and accounting practices. As a professional service business, the owners of LLPs aren’t personally liable.
The main difference between the three types is the degree of liability. The general partnership holds the most danger to the owners.
Limited liability and limited partnerships are somewhat protected from direct responsibility.
However, taxation is the same for all types. Owners have to file their own taxes and pay any fees.
What’s a Corporation?
Now, let’s take a look at corporations. The corporation is considered to be a separate entity from a legal standpoint.
You must register the corporation with your local government. Owners of the corporation are called shareholders and aren’t liable for business debts or obligations.
Types of Corporation
There are two main types of corporations; C-corporation is considered to be a traditional one. Corporate income taxes apply to this type. However, if the shareholders receive any dividends, they have to indicate it in their personal tax forms.
The other type is the S-corporation. This type is similar to a partnership. When registered as an S-corporation, owners will have to file the income and losses in their personal tax forms.
Both types are managed by a board of directors that’s selected by the shareholders. The board makes everyday business decisions, hires high-level employees, and runs the business in shareholders’ names.
S-corporations can only issue one class of stocks to 100 shareholders. C-corporations can issue different levels of stocks to an unlimited number of shareholders.
The Differences
To start any business requires capital. Comparing a partnership vs. corporation, we have to take a look at the startup cost.
It’ll cost more to establish a corporation. There are administrative fees, taxes, and legal requirements. Corporations also need licenses and permits, and often, hiring legal help is the way to go.
Partnerships require lesser startup costs. You’ll have to obtain a permit from the local government and register your business.
It’s advisable to create a partnership if you’re a small business. A corporation is best suited to larger enterprises.
Management is different between the two as well; partnerships are simpler. The owners are often directly involved in business decisions. For instance, they usually hire employees and oversee the business as a whole.
Shareholders run corporations, but their input mostly involves hiring the CEO and other management. From that, the day-to-day business is in the hands of employees.
Working for a business is also different. In the partnership, if an owner works for the company, he’s not considered an employee. The owner will have to file appropriate taxes, paying a fee for federal entitlements, such as social security.
In a corporation, if the owner wants to work for the business, he’s an employee. He pays half of the employment tax, and the corporation covers the rest.
Taxes
Taxes are another point of divergence. Corporations, especially C-type, are considered as double-taxed; it includes corporate tax.
This means a corporation pays tax on the earned income. And when the money is divided between the owners, each person will have to pay tax again.
A partnership doesn’t have a corporate tax. Often, the owners don’t have to pay tax on what’s received. The taxation fee only has to be paid if the divided earnings exceed the investment the partner brought to the business.
Partnership vs. Corporation: Which Is Right for You?
To pick a side in the partnership vs. corporation argument, you have to evaluate your goals. You need to consider taxation, how you want to gain capital, and if you can handle the risk.
Not only are tax forms different for the types of businesses, but you also have to keep certain benefits in mind.
For example, partnerships can deduct 20% of the income before filing the tax forms. Alternative, C-corporations have some leeway by subtracting bonuses for employees or pushing some of the profit to a different fiscal year.
Raising capital with bank loans can be with both partnerships and corporations. However, investors are better suited for a corporation.
In return for their investment, they gain stock. This is the main initiative for an investor to put their money into a business.
With a partnership, your personal funds and assets are at risk. Because the owner is liable for the business’s debts, you may risk your personal wealth, should anything happen.
Alternatively, a corporation is more difficult to maintain, but there’s protection in place. A corporation is liable for the losses, not the owners.
If you have any questions or would like some more information, consider contacting us.
