Partnership Vs Corporation (Best Review On Key Differences)

Thinking about partnership vs corporation?

What is the difference between partnership and corporation?

Which type of business is better to choose?

In this article, we will break down the notion of partnership vs corporation.

We will first define what is a partnership, what is a corporation, analyze the main differences between a corporation vs partnership, the important considerations in choosing between the two, advantages and disadvantages, give you charts and more!

Are you ready!

Let’s get started…

Partnership vs Corporation

A partnership is a business owned by two or more individuals who share the partnership’s profits and losses.

On the other hand, a corporation is a legal entity owned by its shareholders.

While the partners in a partnership are personally responsible for the partnership’s debts, liabilities and obligations, the shareholders in a corporation do not have any personal responsibility for the company’s liabilities and legal obligations.

Choosing between a partnership vs. corporation can have important legal consequences on your personal liability, how your business is managed, taxation and more.

Here are some areas where there are differences between corporations and partnerships:

1. Formation formalities
2. Ownership structure
3. Set up costs 
4. Taxation
5. Personal liability
6. Business management 

To get a better sense of the differences, let’s first define what is a partnership. 

A partnership is a default business structure where it is owned and operated by two or more people.

For example, if John and Suzy decide to start baking cookies, pooling some money and resources together to sell their cookies for a profit, by default, they will be acting as partners in a partnership.

This means that John and Suzy will both own and operate the partnership.

If John and Suzy are not satisfied with the default partnership regime, they can specifically opt for a corporation by filing the necessary paperwork with the corporate registry and paying the necessary fees.

General partnership (GP)

A general partnership is a type of partnership where two or more individuals act as co-owners and operators of the business. 

General partnerships are the most common type of partnerships out there.

The co-owners in a general partnership share the business profits and losses.

For example, if Helen and Mary start a yoga business under a general partnership, they will share the profits of the business but will also share the losses of the business.

What’s more, if the partnership is in debt, the creditors can go after the partnership’s assets but also Helen and Mary’s personal assets.

Limited partnership (LP)

A limited partnership is slightly different than a general partnership.

In a limited partnership, you have two categories of partners: the general partners and the limited partners.

General partners are responsible for the day-to-day operations of the business and are personally responsible for the company’s debts, liabilities and legal obligations.

Limited partners are like investors.

A limited partner is a person who is accepted by the general partners to enter into a partnership by investing a certain amount of money just like an investor but they do not manage the day-to-day operations of the partnership. 

Limited partners have a similar position as shareholders do in a company.

Furthermore, they benefit from limited liability protection whereby their liability towards the partnership is limited to the extent of their investment.

Limited liability partnership (LLP)

A limited liability partnership is a partnership where the owners, or partners, do not assume personal liability with respect to the business of the partnership.

Quite often, you’ll see a limited liability partnership when dealing with law firms and accounting firms.

Even though the partners do not share personal liability for the debts and liabilities of the partnership, it’s worth noting that the partnership still remains a pass-through entity with respect to its business revenues.

The partners will report the business revenues on their personal income tax based on their share of the partnership revenues.

A corporation is a separate legal entity from its shareholders.

To operate a business under a corporation, a person must legally form the corporation, complete the necessary documents and pay the necessary fees to that effect.

Unlike a partnership, the owner of the corporation is legally independent and distinct from the business from all aspects.

In a corporation, the shareholders appoint the members of the board who in turn appoint the company officers to successfully operate the business.

C-Corporation (C Corp)

A C-corporation or c-corp is a corporation just like any other corporation.

A C-corporation is incorporated by filing its articles of incorporation in the relevant state and paying the state filing fees.

Once the company is incorporated, by default, it is considered to be a C-corp for tax purposes.

It’s called C-Corp as it will be taxed under Subchapter C of the Internal Revenue Code.

A C-corporation is taxed directly on its own income without impacting its shareholder’s taxation.

If the C-corp pays dividends to its shareholders, then the shareholders will need to report the dividend income on their personal income taxes.

Under a C-corporation, you have the ability to issue an unlimited number of stocks, create different categories of shares and issue shares to non-residents of the United States.

S-Corporation (S Corp)

Legally speaking, an S-Corporation offers the same limited liability protection as a C-Corporation.

An S-Corporation and a C-Corporation are the same except for their tax treatment. 

To form an S-Corp, you will go through the same process as forming a corporation which is to file your articles of incorporation with the relevant state and pay your state filing fees.

Once you’ve incorporation the business, you must then make an election to become an S-Corp.

When the S-corp election is made and if your corporation is eligible, the S-corp will be taxed under Subchapter S of the Internal Revenue Code.

For instance, to be eligible to make an S-Corp election, you must not have more than 100 shareholders, all must have the same class of stocks and must all be U.S. residents.

If your S-Corporation election is approved, the S-Corp will become a pass-through taxation entity.

The pass-through taxation mimics the taxation regime applicable to partnerships.

Starting a business involves making countless decisions on a daily basis.

Deciding on the type of business to operate is one of such decisions entrepreneurs need to make early on.

Do you go with a partnership or a corporation?

Which is better?

What are the main differences?

In this section, we’ll break down the main differences between a partnership vs corporation.

Formation formalities 

A partnership is formed with much less formality when compared to a corporation.

To form a partnership, all you need is to get together with other individuals and start operating a business.

You may need to get a business license, register for a DBA or a fictitious name and put together a partnership agreement between the partners.

To form a corporation, you must incorporate the legal entity.

This means that you’ll need to file your articles of incorporation, register for a DBA as needed, adopt your company by-laws, issue shares to your stockholders and continually maintain your company’s registration so you remain in good standing.

Startup costs 

Starting a partnership can be less expensive than starting a corporation.

A partnership can register its business in the state it intends to operate, get the necessary business licenses for its business and get started.

On the flip side, a corporation can be more expensive to form as it requires the filing of the company’s incorporation papers.

Corporations can cost more to form than partnerships.

To form a corporation, you must file your articles of incorporation, determine if you need to file for a DBA, pay your filing fees, have your initial organization meetings, adopt your by-laws, issue shares to the stockholders, get a business license, put in place a shareholder agreement and more.

For someone looking to start a small and simple business, a corporation may appear to be administratively heavy.

Ownership structure 

An important difference between a partnership and a corporation is that they differ in their ownership structure.

A partnership is a type of business owned by two or more individuals and where all the company’s revenues and expenses are shared by the owners.

A partnership can have many partners but the more partners you have in a business, the more it can become difficult to manage as they all have a say in the business.

Also, the partners will own the partnership as outlined in their partnership agreement or by default they will all equally own a share.

On the other hand, a corporation is a separate legal entity from its shareholders who do not necessarily share in the revenues and expenses with the company.

Shareholders have a say on important decisions involving the company and elect the members of the board.

Limited liability 

One significant difference between a partnership and a corporation is with respect to the limited liability protections afforded by law.

The general partners of a partnership are personally responsible for the business.

In other words, they can reap the rewards if there are profits but they will be personally held responsible for the company debts and obligations.

In fact, a creditor of the partnership can pursue the personal assets of a general partner to satisfy the partnership debt.

The situation for a corporation is different.

With a corporation, the company is a separate legal vehicle from the shareholders.

As a result, the shareholders are not held personally responsible for the company’s debts and liabilities.

The corporation shields the shareholders from personal responsibility.

That’s what we call limited liability protection.

The corporate structure giving limited liability to shareholders is a major advantage when comparing a partnership vs corporation.

Particularly, entrepreneurs starting a business can have the assurance that they will not risk everything they own by starting a new risky venture.

Taxation

Another notable difference between partnerships versus corporations is with respect to taxation.

Although you should verify with an expert on your specific tax situation, generally, the general partners will report their share of the profits and losses in their personal income tax return.

A partnership is a pass-through entity.

This means that the profits and losses of the partnership will flow-through or “pass-through” to the general partners.

The partnership does not report its business income independently from its partners, instead the business income is divided between the general partners in the proportion of their ownership and taxed on the general partners personally.

Typically, the partners will need to file their personal income tax return (Form 1040) and complete a Schedule K-1 to report their partnership income, losses, credits and deductions.

In contrast, a corporation will be taxed separately from its shareholders.

This means that the corporation will have to report its own taxes to the tax authorities and pay what it owes without impacting its shareholders.

Similarly, the shareholders of a corporation will file their own personal income tax returns and pay their own taxes.

By default, the revenues and losses of the corporation do not pass through to the shareholders as it does with a corporation, except if you’ve elected to be taxed as an S-Corp.

Unlike partnerships, a corporation and shareholders are taxed twice on the same business income.

This is referred to as “double taxation”.

In other words, when the corporation earns a profit, it pays taxes directly as corporate income taxes.

Then, when it pays its shareholders dividends from its net income, the shareholders will personally be taxed for the dividend income.

So the same business revenue is taxed at the corporate level and at the shareholder level.

Management 

The management structure of a partnership is different when compared to a corporation. 

In a partnership, the general partners own, operate and manage the partnership.

As partners, they must make sure that the partnership is run in a diligent and profitable manner.

The general partners are accountable to one another as business managers.

As it relates to corporations, the shareholders of the company, even though they are the owners of the business, do not run and manage the company necessarily.

The shareholders appoint the board of directors who in turn run the business.

The corporation’s board of directors is responsible to ensure the company is running in a diligent and profitable manner and is accountable to the shareholders.

Governance 

A partnership has fewer governance rules to adhere to than a corporation.

The partners run the business and are accountable for the success and failure of the partnership.

They are generally involved in day-to-day decision-making and are intimately aware of the affairs of the partnership.

Since the partnership is not a separate legal entity, it does not have the same obligations to elect a board of directors, hold annual shareholder meetings and so on.

Corporations are more heavily regulated and must comply with more rules and regulations.

For example, a company must hold an annual shareholder meeting, must have a board of directors, must keep minutes of the board’s decisions, maintain a record of all important decisions in its minute book and so on.

In addition to the internal governance requirements, a corporation must also file annual reports with the state where it is registered.

Financing 

A partnership is formed primarily because the partners have complementary skills and wish to actively run and own the business together.

The rigidity in the ownership of a partnership makes it less flexible and attractive for external investors who may see investment opportunities. 

A partnership does not have the ability to issue shares or transfer a percentage of the partnership ownership to investors as easily as a corporation.

As a result, a partnership’s ability to finance itself is often limited to the channel individual have access to such as bank loans, lines of credit and debt.

On the other hand, a corporation is a legal entity able to issue shares to investors and third parties with much greater ease.

A corporation’s ability to issue different categories of stock in an unlimited number makes it the preferred business structure for investors.

As the corporation expands operations and requires additional liquidity, it can more easily attract investors, angel investors, venture capitalists and still have the option to get traditional financing just like a partnership. 

How do you decide which is better, a corporation or a partnership?

How do you choose between a partnership vs corporation?

Let’s look at the main considerations helping you choose between a corporation and a partnership.

Tax exposure

One consideration is with respect to taxation and tax exposure.

How do you want your business revenues to be taxed?

Every person’s situation is different and so you’ll need to decide carefully what is the best option for you.

If you go with a partnership, the business revenues will be taxed directly on you as a partner.

For example, if you own 50% of the partnership and the partnership earns $100,000, you will need to report $50,000 on your personal income taxes.

With a corporation, you do not personally pay taxes on business revenues.

If the corporation earns $100,000, the corporation will file its own taxes and pay its own taxes.

However, if you want to take profits out of the company by paying yourself a dividend, you will personally need to pay taxes on the dividends you get.

The tax consequences may be different for you.

Financing options

Another consideration is how much financing you may need in the future.

In other words, the more you want to grow your business and need access to capital, the more you’ll need to think about which business structure is more suitable between corporation vs. partnership.

If you need to raise capital at one point in time in the life of your business, selecting a corporation will give you a much better chance of attracting investors.

That is the case as a corporation can issue different categories of stock like preferred shares.

Investors prefer corporations over partnerships as they have the ability to own a portion of the business without becoming liable to the business and they can eventually sell their shares and make a good profit.

Risk exposure 

Another consideration between a partnership and a corporation is your risk tolerance.

Are you comfortable with the fact that in a partnership, your personal assets are exposed to the creditors of the business?

A small organization may be able to successfully operate under a partnership structure.

However, most organizations important in size, multinationals and international organizations are structured as a corporation.

A partnership and corporation will each have advantages and disadvantages.

For example, an advantage of a partnership is that it is easy to set up and start doing business while a corporation offers its shareholders limited liability protection. 

On the other hand, while a partnership is easy to form, it is not the most appropriate vehicle to scale your business whereas a corporation is harder to form and maintain but can give much greater flexibility in getting capital and raising money to scale operations.

Here is a quick chart to help you identify the advantages and disadvantages of a partnership versus a corporation:

To give you a bird’s eye view of the differences between corporations vs partnerships, here is a comprehensive table to quickly highlight the differences between a general partnership, limited partnership, limited liability partnership, C-Corp and S-Corp:

Partnerships

Corporations

Partnership vs Corporation FAQ’s

What is the difference between partnership and corporation?

Here are the main differences between a partnership and a corporation:

1. Formation: partnership is easier to form than a corporation 
2. Ownership: partnership requires at least two people or more while a corporation needs a minimum of one person
3. Startup costs: a partnership is cheaper to set up than a corporation 
4. Limited liability: a corporation offers limited liability protection while a partnership leaves the partners’ personal assets exposed
5. Taxation: a partnership is a pass-through entity while a corporation can be taxed either as a pass-through entity or pay its taxes independently of its shareholders 
6. Management: the partners usually manage the partnership actively while the shareholders of a corporation element the board members so they ensure the company is well-managed 
7. Ongoing costs: a partnership is cheaper to maintain on an ongoing basis compared to a corporation 

Which is better between a partnership and a corporation?

Here is the question: is a partnership or corporation better?

The answer depends on your plans and aspirations for your business.

Generally, a corporation will be a better corporate vehicle to start and grow a business, have better future financing options while at the same time protect your personal assets.

A partnership may be a better option if you want to get something up and running quickly and are not looking to grow internationally or operate in a risky industry.

At the end of the day, any entrepreneur will need to decide what is better for them to achieve their objective.

Is a partnership a corporation?

No. A partnership is not a corporation.

A partnership is a type of business that is owned and operated by its “partners” whereas a corporation is owned by its “shareholders” who do not necessarily operate the business. 

Typically, the partners in a partnership share the day-to-day management of the business and provide one another with complementary skills.

In a corporation, the shareholders appoint the board members who then have the responsibility to put together the right team to handle the day-to-day operations of the corporation.

How to choose between partnership vs corporation? 

If you are looking to start a business, it’s important to choose the business structure and legal entity to help you achieve your objectives.

What is the difference between a company and partnership you may ask?

If we had to reduce the decision to the top three reasons why an entrepreneur should choose a corporation vs partnership, we’d pick the following key differences:

1. Limited liability protection
2. Scalability of the business 
3. Taxation

Depending on your risk tolerance, your business ambitions and tax circumstances, you may prefer a partnership over a corporation or a corporation over a partnership.

If you aspire to grow the business, operate your business in many states, nationally or internationally, you may want to consider a corporation.

If you are looking to set up a local business primarily in one state and you have the necessary liquidity and financing to start the business and operate it to your satisfaction, then a partnership will do. 

Bear in mind that most globally recognized brands are corporations.

What is the difference between partnership vs S Corp

An S Corp is essentially a corporation having a legal entity separate from its shareholders.

The reason why it’s called an S Corp is to distinguish the taxation regime the corporation is subject to.

An S Corp is subject to the Subchapter S of the Internal Revenue Code allowing it to pass through its business income to its shareholders.

However, not all corporations will qualify to be an S Corp.

To qualify as an S Corp, you need:

1. Have no more than 100 shareholders
2. You can only issue one type of stock to all shareholders
3. All shareholders must be US residents

A partnership on the other hand is by default a pass-through entity where its business income is taxed directly in the hands of its partners in proportion to their ownership percentage.

Although an S Corp and partnership offer pass-through taxation, an S Corp provides its shareholders with limited liability protection just like any other registered corporation.

What is the difference between partnership vs C Corp

A-C Corp is a regular corporation that is incorporated by filing its articles of incorporation and paying the state filing fees just like any other corporation.

It’s called a C-Corp as it is taxed under Subchapter C of the Internal Revenue Code. 

When a company is incorporated, by default it is taxed as a C Corporation unless it formally elects and qualifies for an S Corp taxation regime.

The main difference between a partnership and a C Corp has to do with the limited liability protection, taxation and ownership structure.

A partnership is owned by its partner members whereas a corporation is owned by its shareholders.

The partners are generally actively involved in the business whereas a corporation can have shareholders that are employees of the company or passive investors.