Partnerships offer more flexibility but leave owners open to legal liability, while corporations protect members from liability but have less flexibility. Limited liability companies offer a balance between the two. Taxation, management, and capital raising also differ between the two structures. Different types of companies, such as C and S corporations, also have varying tax responsibilities.
The main differences between a partnership and a corporation are the way liability is distributed, the way taxes are assessed, the flexibility in managing and selling the business, and the way it raises capital. Partnerships are generally more flexible than corporations, but they can be harder to sell. They also leave the owners open to legal liability. Corporations protect their members from legal liability and often have an easier time raising funds, but they have less flexibility and may have to file a lot of paperwork with the government in their area. Sometimes committing to a limited liability company or a specific type of company, such as an S corporation, can offset some of the negative points of each model.
Personal risk
The company’s shareholders are only held liable for their actual investment in the company, as the company is viewed as a separate legal entity. This protects their accounts and personal assets. General partnerships do not have this level of protection because the corporation is not its own entity, making them liable for their own actions and debt. For example, if a company goes bankrupt, its shareholders only lose what they put into the company, while a company’s owners might be responsible for repaying debt to creditors from personal accounts.
Taxes and income
Partnerships are generally easier to create and offer a streamlined approach to tax reporting. Owners split the profit and file this income on their personal income tax forms. Lawyers are often involved in crafting the agreement between landlords, so ownership percentages, roles, and expectations are clear to all involved. Corporations must file taxes separately from owners as they are separate entities. The equity is divided among the owners based on the number of shares held in the company.
Flexibility
A corporation is generally a little less flexible than a partnership in terms of how it is structured and managed and in terms of ownership changes. Members of a company must act in accordance with the company charter and the business is run by a board of directors, rather than by direct input from the owners. In some regions, companies are also required to file certain types of documents, such as meeting minutes, with the local government each year. Corporations are more flexible in one respect, however: it’s much easier to transfer ownership of part of a company than it is to sell part of a company.
Partnerships are generally less structured, as they only need to join a partnership agreement rather than a charter. Decisions are made by partners, rather than a board of directors, and usually don’t have to file too much paperwork with local governments. However, it is more difficult to sell this type of business, as each part of the business has to be transferred or sold individually. This requires a lot of paperwork and usually needs to be overseen by a lawyer.
Capital and credit
How each of these types of business structures also raises capital in different ways. Corporations raise money by selling financial instruments such as stocks and bonds. A partnership must raise funds from its members. It can do this by making members contribute more or by getting new members. It can also raise funds by getting a loan. In terms of credit, because a company is considered a separate entity, it may have its own line of credit, while a partnership may not be able to, depending on the credit history of the partners.
Limited liability partnership
Limited liability companies can be created so that only one person has unlimited liability, offering protection similar to that of the owners of a company. Under this agreement, the partners are not held liable for the actions or negligence of the other partners. Depending on your country or jurisdiction, it may be possible for this type of company to offer this level of protection to all business owners.
Halfway between a corporation and a partnership, a limited liability company allows for pass-through taxation and a less rigid operating structure than a corporation. This entity could be an individual, a partnership or a corporation. The rules surrounding partnerships and corporations are constantly evolving, so you may need the advice of a lawyer or accountant to decide your options for setting up a limited liability company.
Types of companies
General and tax responsibilities can differ between different types of companies. In the United States, some states offer owners the option of filing for a C or S corporation. C corporations are the most common type of corporation found in the United States, and they pay taxes separately from their shareholders. Double taxation can occur in this type of situation, as the company has to pay taxes on its profits and dividends. This can sometimes be avoided by paying shareholder salaries with marginal benefits rather than dividends.
AC Corporation may also decide to switch to an S Corporation. This is generally done by filling out an IRS Form 2553. S corporations are taxed in a pass-through fashion, allowing shareholders to pay taxes like owners in a partnership. Shareholders report the company’s profit or loss on their respective tax returns.
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