Understanding the similarities of partnership and corporation is an important part of choosing a structure for your business.3 min read
Understanding the similarities of partnership and corporation is an important part of choosing a structure for your business. Basically, the only similarity between these entities is that they are both owned by groups of people instead of an individual.
Corporations vs. Partnerships
There are many different ways that you could structure your business, but two of the most popular options are forming either a corporation or a partnership. While these entities may seem similar at first glance, as their ownership is comprised of a group of people, they are actually very different, and it's important that you understand these differences before choosing a structure for your business.
The primary reason to structure your business as a corporation is that the owners, known as shareholders, are only responsible for the liabilities of the business under a limited set of circ*mstances. Partnerships, on the other hand, do not provide these liability protections. They are, however, much easier to establish than corporations.
In general, forming a corporation is much more beneficial than establishing a partnership, although there are some drawbacks to the corporate structure that you should keep in mind.
The legal structure that you choose for your business can impact several important issues:
- The liability of your business's owners
- The taxes that will apply to your business
- How you will operate your business
How to Create a Partnership
One of the primary reasons to structure your business as a partnership is that you will not need to follow a legal process to get your partnership started. If you own and operate a business with another person, you are automatically considered a partnership until you choose a different structure for your business.
You can form a partnership using only a verbal agreement. A written agreement, however, is usually the better idea, as it can help prevent disputes between you and your partner.
With your partnership agreements, you can outline important issues related to your business:
- How you and your partner will make business decisions
- What each partner will contribute to the business
- How profits partners will divide profits
If you and your partner aren't interested in managing the day-to-day operations of your business, you have the option of hiring an outside manager.
Forming a Corporation
When you form a traditional C corporation, you and your company are treated as legally separate. Large companies are the most common type of C corporation, although small two-person businesses can also choose this structure. If you're interested in forming a C corporation, there are several steps that you must complete. This is one of the biggest differences between corporations and partnerships.
The first thing you need to do to form your corporation is to choose a name for your company. Then, search your state's business name database to make sure your name isn't already in use. Once you've chosen a suitable name, you will need to register your corporation with your state by filing Articles of Incorporation. Finally, you will need to follow corporate formalities by holding regular meetings for your shareholders and your board of directors. With the largest C corporations, the board of directors usually handles management duties.
Advantages of a Corporation Over a Partnership
The most enticing benefit of the corporate structure is that company shareholders possess no liability for the company's debts. On the other hand, with a partnership, the business and its owners are not treated as legally separate, meaning owners are liable for business debts. If the partnership incurs debts and does not possess enough assets to cover these debts, creditors can pursue the owner's personal property.
When a corporation does not have the funds necessary to satisfy its debts, the owner's personal assets are usually protected from creditors. You should note that there are some cases where individual shareholders can be liable for the debts of the corporation. For instance, if a shareholder provided their personal guarantee toward a debt, they can be liable if the debt is not paid.
In some circ*mstances, the courts may decide that shareholders are responsible for the acts of the corporation. This practice is called piercing the corporate veil.
There are several reasons that courts may decide to pierce the corporate veil:
- The funds of the corporation and those of shareholders have mingled.
- The corporation has failed to follow corporate formalities.
- The corporation does not have adequate insurance or capitalization.
- The corporation has not paid its state taxes or has violated a law.
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