Partnership Corporation Definition

Understanding the partnership corporation definition is essential when choosing a business structure for your startup.3 min read

Partnerships

In a partnership, a business is owned by two or more individuals. The profits and losses (including liabilities) are shared equally among the partners. Just like sole proprietorships, partnerships are easy to set up and run. However, the partners are personally responsible for the business debts and liabilities incurred by the partnership. The partners may disagree on how to run the business, which could cause disputes and lawsuits.

Corporations

This is a type of business structure that is owned by shareholders. It is a separate legal entity and is much more difficult to set up and run than sole proprietorships and partnerships. Larger businesses favor corporations over other types of business structures.

A major advantage of a corporation is the limited liability of its shareholders. Shareholders are not personally responsible for the business' debts, and their losses are restricted to the money they've invested. The ownership interest of the business can be transferred to others by selling the shares.

The expense and difficulty of starting and running a corporation is one of its major disadvantages. Corporations are governed under state laws and as such, they must follow specific procedures and rules for reporting and record-keeping.

One of the types of corporations (subchapter C) pays taxes on its earnings. The shareholders of a subchapter C corporation also have to pay taxes on the dividends they receive, which leads to double taxation.

Another type of corporation is the subchapter S. Although this business structure is more complex than partnerships and sole proprietorships, it is less onerous than a subchapter C corporation.

Starting a Partnership

A partnership begins when two or more persons decide to go into business together. The partners do not need to officially file any documents before commencing business operations.

Forming a Corporation

Business owners looking to incorporate their business must first file articles of incorporation to legally form a corporation in their state. They must register in all the states where they intend to carry out business transactions. Every state charges a fee for filing articles of incorporation.

Taking a Risk

Individuals who form a partnership have unlimited liability when it comes to debts incurred while operating the business. This means that their personal assets are at risk when the creditors come calling and they may end up losing their cars, homes, and other personal assets if the business' assets are unable to cover its debts.

Corporations, on the other hand, provide their owners with limited liability protection against business obligations and debts. If the company becomes bankrupt, creditors cannot use the personal assets of owners to settle business debts. The shareholders of the corporation are only liable for business debts to the tune of their investment.

Startup Costs

Setting up a corporation is more complex and expensive than forming a partnership. When registering a corporation, owners are expected to:

• Pay several filing and administrative fees.
• Keep to complex legal and tax requirements.

Business owners must obtain the requisite local and state permits and licenses and file articles of incorporations.

Due to the complexity of a corporation's setup, most owners prefer to hire attorneys to help them with the process. The U.S. Small Business Administration advises that corporations should only be formed by large established businesses with multiple employees.

Taxation

Although partnerships do not pay business taxes, the profits are passed through to the general partners, who report the income on their personal tax returns and pay the equivalent taxes.

Corporations must pay federal and state taxes while shareholders are required to pay taxes on any dividends, bonuses, and salaries received.

Management Responsibilities

Partnerships usually employ simple management structures. The general partners make all business decisions and decide how the business is run. In most cases, the general partners assume managerial responsibilities.

The shareholders make up the governing body of a corporation. Regular shareholder meetings are usually called to decide on company policy and management. Although shareholders are not directly involved in the day-to-day operations of the company, they are tasked with hiring and monitoring the performance of managers.