The type of business you have will play an important role as it can affect a multitude of different factors. Given its importance, you’ll want to make sure that you choose the right type of business. To help you out, we thought it would be helpful to put together a brief article about partnerships and corporations. If this is something you want to learn more about, read on as we break down the differences between these two types of businesses.
What Is a Partnership?
A partnership is an agreement between two or more people to run a business together. The IRS sees partnerships as pass-through businesses, which means that the business’s profits and losses are shared among the partners and added to their personal income. This means that partners have to pay personal income taxes on their share of the business, as well as self-employment taxes and estimated taxes. The business itself may also be responsible for employment taxes and excise taxes specific to its industry.
There are three types of partnerships:
- General Partnership: A partnership is a business relationship between two or more people who agree to cooperate in order to earn a profit. In a general partnership, each partner is equally liable for the debts and obligations of the partnership. This means that if the partnership is sued, the partners’ personal assets are at risk.
- Limited Partnership: A limited partnership is a business structure in which one partner has full personal liability while the other partners are only liable for the amount they have invested. This type of partnership must be formed through a state government agency. This would be the best structure for a business with one partner who is active in the daily operations and can take on liability, as well as one or more less-active partners who contribute to the business but don’t want to be fully liable. The limited partners cannot be involved in the day-to-day business functions.
- Limited Liability Partnership: A limited liability partnership is a business structure that offers liability protection to all partners. This type of partnership is regulated by the state, and it allows partners to shield their personal assets from the business. Additionally, partners are not responsible for the actions of other partners within the limited liability partnership.
What Is a Corporation?
A corporation is a business entity that is separate from its owners. This means that the owners are not personally liable for the debts and losses of the corporation. The corporation is also held to a higher standard of record-keeping than other business entities, which means that the owners are required to file annual reports, conduct annual shareholder meetings, elect a board of directors to oversee the business, and follow company bylaws.
How Do Partnerships and Corporations Differ?
The main difference between partnerships and corporations is that corporations have a legal existence separate from their owners, while partnerships do not. This means that corporations can enter into contracts, own property, and sue or be sued in their own name. Partnerships, on the other hand, are not separate legal entities from their owners. This means that partners are personally liable for the debts and obligations of the partnership.
Another key difference between partnerships and corporations is how they are taxed. Corporations are taxed as separate entities, while partnerships are not. This means that corporate income is taxed at the corporate tax rate, while partnership income is taxed at the individual tax rate.
Finally, corporations have shareholders, while partnerships have partners. Shareholders have limited liability, which means they are only liable for the amount of money they have invested in the corporation. Partners, on the other hand, have unlimited liability, which means they are personally liable for the debts and obligations of the partnership.
Conclusion
We hope this article proves to be useful when it comes to helping you gain a better understanding of the differences between partnerships and corporations. While it may seem complicated at first, the information that we’ve discussed above should be enough to give you good foundational knowledge on this subject. Be sure to keep everything that you’ve learned here in mind so that you can make the most informed decisions for your business.
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