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What is the Difference Between a Partnership and a Corporation?

Partnerships are more flexible than corporations, but the owners are open to legal liability, making them more difficult to sell.
Corporations can protect their members and employees from legal liability and can typically raise money more easily, but they have less flexibility and more governmental paperwork.
Corporations do not have to pay the typical self-employment taxes that partnerships have to pay.
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  • Originally Written By: Sheri Cyprus
  • Revised By: Carrieanne Larmore
  • Edited By: O. Wallace
  • Last Modified Date: 08 September 2014
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The main differences between a partnership and a corporation are how liability is distributed, how the taxes are assessed, the flexibility in running and selling the business, and how it raises capital. Partnerships are generally more flexible than corporations, but they can be harder to sell. They also leave owners open to legal liability. Corporations protect their members from legal liability and often have an easier time raising money, but they have less flexibility and may have to file a lot of paperwork with the government in their area. Sometimes engaging in a limited liability company or a specific type of corporation, like an S corporation, can offset some of the bad points of each model.

Personal Risk

Corporation shareholders are only held liable for their actual investment in the company, because the corporation is seen as a separate legal entity. This protects their personal accounts and assets. General partnerships do not have this level of protection because the company is not its own entity, making them liable for its actions and debt. For example, if a corporation goes out of business, then its shareholders only lose what they put into the business, whereas owners in a partnership could be responsible to repay debt to creditors from personal accounts.

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Taxes and Income

Partnerships are generally easier to create and offers a simplified approach to reporting taxes. Owners split the profit and file this income on their personal income tax forms. Lawyers are often involved in creating the agreement between owners so ownership percentages, roles, and expectations are clear to everyone involved. Corporations must file taxes separately than its owners since they are separate entities. Equity is divided amongst 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 its structured and run and in terms of changing ownership. Members of a corporation have to act in accordance with the corporation's charter, and the business is run by a board of directors, rather than by direct input from the owners. In some regions, corporations are also required to file certain types of documents, like meeting minutes, every year with the local government. Corporations are more flexible in one aspect, however: it is much easier to transfer ownership of part of a corporation than it is to sell part of a partnership.

Partnerships are generally less structured, since they only have to adhere to a partnership agreement rather than a charter. Decisions are made by partners, rather than by a board of directors, and they usually don't have to file as much paperwork with local governments. It is more difficult to sell this type of business though, since each part of the business has to be individually transferred or sold. This requires a lot of paperwork, and usually has to be overseen by a lawyer.

Capital and Credit

The way each of these types of business structures also raises capital in different ways. Corporations raise money by selling financial instruments like stocks and bonds. A partnership has to raise money from its members. It can do this by having the members contribute more, or by getting new members. It can also raise money by getting a loan. In terms of credit, since a corporation is considered a separate entity, it can have its own line of credit, whereas a partnership may not be able to, depending on the credit history of the partners.

Limited Liability Partnerships and Companies

Limited liability partnerships can be created so that only at least one person has unlimited liability, offering similar protection as owners of a corporation. Under this agreement, partners are not held responsible for the actions or negligence of the other partners. Depending on the country or jurisdiction, it may be possible for this type of company to offer this level protection to all owners of the company.

Halfway between a corporation and a partnership, a limited liability company allows for pass-through taxation and a less rigid structure of operating than a corporation. This entity could be an individual, partnership, or a corporation. Rules regarding partnerships and corporations are constantly changing, so advice from a lawyer or accountant may be necessary when deciding the options available for creating a limited liability company.

Types of Corporations

General and tax liability can differ between different types of corporations. In the US, some states offer owners the choice of filing for a C corporation or an S corporation. C corporations are the most common type of corporation found in the US, and pay taxes separately from their shareholders. Double taxation can occur in this type of situation, because the corporation must pay taxes on its profits as well as on dividends. This can sometimes be avoided by paying shareholders salaries with fringe benefits rather than dividends.

A C corporation can also decide to change into an S corporation. This is generally done by filing a 2553 IRS form. S corporations are taxed in a pass-through manner, allowing the shareholders to pay taxes like owners in a partnership. Shareholders report the corporation's profit or loss on their individual tax returns.

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Discuss this Article

anon341477
Post 9

Do the taxes collected from enterprises companies go to the state or federal government in Nigeria?

anon128062
Post 7

I am a share holder of a limited liabilty company and since the inception of the company in 2005. i have not been given my share of the Profit/Loss. What is your view on this?

anon88200
Post 6

I have a small business with just two or more. Fewer

employees are better to stay as a sole owner or

incorporate.

anon55042
Post 5

what's the link between a partnership and the modern company?

toadsjunk
Post 4

I work for a small company for which I also own shares of stock. We are private and sole proprietor and recently change to a S corp. Am I entitled to receive any kind of profit/loss statement as it relates to the company or my stock value? Our Pres/CEO (majority stock holder) says no - there are trust issues so I was just wondering what my options might be, we are in the middle of buyout negotiations. We are located in VA, but are inc. in DE.

Thanks!

apioffice
Post 2

When switching from a Partnership to an S-Corp., could you please describe any rules concerning transfer of assets?

anon869
Post 1

Could you briefly describe some of the pros and cons for setting up your business as either a corporation or a partnership?

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