Difference Between Partnership and Corporation – Which is Better?

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You’re considering starting a new business and you’ve narrowed it down a bit between a partnership and a corporation.

Now the big question that weighs on your mind:

which is better... a partnership vs corporation?

What is the difference between partnership and corporation anyway?

Clients come to me often wanting help with making this big decision.

You can come to me too. Just send an email to sam@mollaeilaw.com and I'll help you figure out what’s best for you for your business.

In the meantime, you may find the information contained in this article useful.

I’ve put together some of the key points you need to know in order to make an informed decision about a corporation vs partnership.

Let’s get started...

 

Partnership vs Corporation

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When comparing a partnership vs corporation, the main difference is that a corporation is separate from the owners while a partnership and the owners share any benefits and risks of the business.

You also want to look at the advantages and disadvantages of a corporation vs partnership.

A partnership is formed with at least two individuals who want to do business together and share the ownership, profits, and liabilities of the business.

A corporation is owned by shareholders and can be formed for profit or for non-profit. If the business is for profit, the profits are reinvested in the business and then divided among shareholders as dividends.

With a partnership, the owners are at risk should anything go wrong. With a corporation, the owners are generally protected.

A partnership is set up easier and has less paperwork, legal requirements, and tax obligations than a corporation.

I can help you make the best decision for your business. Email me at sam@mollaeilaw.com today if you have any questions about this

 

Is a Partnership a Corporation?

No, a partnership is not a corporation. Rather it is a business entity type in which two or more people own the company.

A partnership can be a general partnership, a limited liability partnership, or a limited partnership.

A corporation can be an S Corp, a C Corp, or a Professional Corporation.

 

How Does a Company Differ from a Sole Proprietorship?

Unlike a company, a sole proprietorship doesn’t offer protection for the owner from the business debts and liabilities.

Additionally, there are no documents or fees required to start a sole proprietorship whereas a corporation requires both articles of incorporation and filing fees.

Corporations offer limited liability for its owners and is considered a separate entity. Sole proprietorships don’t offer any protection or separation between the business and the owner.

Sole proprietorships also don’t require any documents, meetings, or records to keep the business going.

 

Difference Between Partnership and Corporation

Life. A corporation continues until dissolved by law while a partnership has a specified duration or may dissolve due to the death of a partner.

Entity. A corporation is a separate entity while a partnership isn’t separate from the owners.

Liability. General partners are liable for the business’s obligations while limited partners are considered liable up to their own contribution amount. In a corporation, a stockholder isn’t liable but may be if the corporate veil is pierced.

Ownership changes. Stock, or ownership, of a corporation can be sold or transferred easily. With a partnership, a change in ownership means that a new partnership must be created.

Generating capital. A corporation can raise capital by selling stocks, bonds, or securities. A partnership can only generate capital in the form of a loan or increased member contributions.

Policies. In the corporation, a board of directors makes the policies. In a partnership, the members usually have to agree unanimously about new policies.

Management. A corporation hires managers while a partnership’s owners are the managers.

If you have any questions about a sole proprietorship or a company, email me at sam@mollaeilaw.com.

 

Similarities Between Partnership and Corporation

The only similarities between partnerships and corporations is that they are businesses owned by two or more people and that they require formation documents be filed with the Secretary of State.

The similarities end there as partnerships and corporations are quite different.

 

Corporation vs Limited Partnership

When it comes to a corporation vs limited partnership, differ quite a bit in how they protect the owners, how they are taxed, and how they are managed.

A corporation is a separate entity from its owners while a limited partnership aren’t treated as a separate entity.

Corporations and limited partnerships are operated differently as well. A corporation has more complex operations than a limited partnership.

Corporations are run by officials that are elected by shareholders while a limited partnership must have a general partner for managing the business and a limited partner who isn’t involved in the business’s daily operations.

A corporation must pay taxes at the corporate level – separately from the owners. The owners then must pay taxes at the personal level, resulting in double taxation.

A limited partnership passes its profits through to the owners and are taxed only at the personal level.

Finally, a limited partnership only protects the limited partners (not the general partners) from the business’s debts and claims while a corporation protects all members.

To form a corporation or a partnership, email me at sam@mollaeilaw.com to get started today.

 

How is a Partnership Like a Limited Liability Company?

A limited partnership is like a limited liability company because both offer limited liability and pass through taxation while being treated like a general partnership for taxation purposes.

A partnership, limited or general, can be formed informally or with formal documentation. You should at least have a partnership agreement to prevent problems in the future.

An LLC is easy to form, but does require formal documents such as the operating agreement and articles of organization.

In a general partnership, each member equally manages the business.

In a limited partnership, there is at least one general partner and one limited partner. The limited partner has no management rights and only funds the company.

In an LLC, the operating agreement specifies management and roles for each member.

Partnerships and multi-member LLCs usually share the profits of the business equally. However, owners of both partnerships and LLCs have flexibility to decide how to allocate business profits and losses.

When it comes to liability, general partnerships are considered to have unlimited liability for business debts and liabilities. With a limited partnership, the limited partner is protected from liability as long as they don’t participate in management or sign a guarantee.

With an LLC, members are protected from any liability in almost all cases.

 

What is the Difference Between an LLC and a Partnership?

The biggest difference between an LLC and a partnership is that the LLC protects its members from liability while the members of a partnership are completely liable.

 

Formation

A partnership can be formed informally and don’t have to be recognized by the state. An LLC has to file formal documents with the state.

An LLC has to be formed with articles of organization and an operating agreement in a specific state.

 

Liability

In a partnership, the partners have personal liability for any debts and obligations of the business. Furthermore, each partner is liable for the actions of the other partners.

An LLC protects its members from any debts and obligations of the business as long as the LLC is treated separately from its owners. Additionally, members are only liable for the business to their extent of contribution.

 

Taxes

Both partnerships and LLCs are pass through entities that don’t file a corporate tax return.

A partnership does have to file a tax return for the partnership, called Form 1065, but no taxes are due by the business. Instead, each partner gets a Schedule K-1 that allocates profits and losses to them.

An LLC doesn’t pay taxes at the corporate level but instead passes the income or loss to each member and taxes are due at the personal level.

It’s important to note that LLCs may elect to be taxed as a corporation, however.

 

Record Keeping

If the partnership isn’t registered with the state, it’s not required to keep records of any meetings.

An LLC, however, does have to hold meetings and keep records.

Both partnerships and LLCs have to make reports to their state usually each year or every other year.

Asyou can see, the differences between an LLC and a partnership are numerous. For some, an LLC is the best choice. While for others it’s a partnership.

There isn’t a one-size fits all solution and you should take the time to consider your business and your needs when deciding between an LLC and a partnership.

If you need help deciding between an LLC and a partnership, just send an email to sam@mollaeilaw.com for help.

 

Conclusion

Sam Mollaei, Esq., Business Lawyer

Sam Mollaei, Esq., Business Lawyer

When you’re deciding between a partnership and a corporation, you have to consider the type of business you want and what fits best.

It’s not something you can easily decide based on a little bit of information, which is why I’ve put together this resource.

If you have any additional questions or are ready to form your business, contact me at sam@mollaeilaw.com today.