Key Takeaways

  • Close corporations offer limited liability, lower administrative burden, and greater control for shareholders than general corporations.
  • Compared to partnerships, close corporations better protect personal assets, offer easier capital access, and allow for succession planning.
  • Five major differences between corporations and partnerships include: structure, formation costs, liability, taxation, and management approach.
  • The 5 advantages of a close corporation include: limited liability, privacy, simplified structure, continuity, and flexible share transfers.

The benefits of a close corporation as opposed to a partnership include potentially lower tax rates, limited liability, and the option to sell stock in exchange for ownership of the business to raise capital.

Five Major Differences Between a Corporation and a Partnership

There are five main differences between partnerships and corporations. The first is the structure of the business. A partnership and a corporation have different structures, with corporations involving more people in the process of making decisions and being more complex to set up. Corporations are legal entities that exist separately from their owners, called shareholders. The shareholders own the business and decide who is responsible for managing it, as well as how it will be run. Partnerships are business entities in which two or more people share ownership. In a general partnership, the two owners share:

  • Management duties
  • Profits
  • Liabilities

In a limited partnership, the limited partners only serve as investors in the business, while the general partners take responsibility for owning and operating the business.

The second main difference between the two entities is the cost for starting the business. A corporation is generally more complicated and expensive to form, often requiring the payment of complex tax and administrative fees. Corporations also have more stringent legal requirements. The first step in forming a corporation is filing the articles of incorporation with the secretary of state or other business agency in the area. Next, the owners must obtain all required permits and licenses to operate. Many corporation owners work with experienced business attorneys for assistance with starting this type of entity.

Liability is another difference between partnerships and corporations. In a partnership, all general partners are personally responsible for legal requirements and company debts. A general partner's personal assets could be seized to pay for debts incurred by the company. A partnership agreement will usually outline the percentage of the company owned by each general partner, which can vary between them.

A corporation comes with limited liability protection, which means that personal assets cannot be seized to pay for business debts. Corporations exist as separate legal entities from their shareholders, so the business itself is responsible for its own legal fees and debts.

How the business is taxed is another aspect in which the two types of business entities differ. A partnership isn't a separate legal entity, so it doesn't pay taxes separately from its owners. Instead, all business losses and profits are passed through the company to the general partners.

The partners must file all business profits and losses on their personal tax returns with the IRS. A corporation will pay taxes separately from its owners, including on the federal and state level, while shareholders pay taxes on their dividends, bonuses, salaries, and other payments received. This can be a benefit as the corporate tax is generally lower than the tax rate on individual income.

The final difference is the management of the organization. A partnership can be run more simply than a corporation, with the partners deciding how the business will be run. A corporation comes with stricter structural requirements. In a partnership, the general partners will typically take on the responsibilities of managing the company, although they may choose to hire out the management tasks and monitor those they've hired to take care of these tasks. A corporation is run by the shareholders, who must meet regularly to go over policies and management decisions.

A shareholder in a corporation isn't usually as involved with the day-to-day operations of a business, but rather will oversee the management team.

Additional Considerations When Comparing Close Corporations and Partnerships

Beyond the five foundational differences, there are other key elements business owners should consider when choosing between a close corporation and a partnership:

  • Continuity of the Business: A partnership may dissolve upon the withdrawal or death of a partner unless otherwise agreed upon. A close corporation, as a separate legal entity, continues to exist regardless of changes in ownership.
  • Raising Capital: Close corporations can issue shares (albeit to a limited number of shareholders), allowing for greater capital access than a typical partnership, which depends solely on partner contributions.
  • Regulatory Compliance: While close corporations are more formal than partnerships, they enjoy reduced requirements compared to publicly traded corporations, offering a balance between structure and simplicity.
  • Dispute Resolution: Close corporations can incorporate shareholder agreements that define resolution processes for disputes, buyouts, and succession—elements that can be more ambiguous in a partnership unless a detailed agreement exists.

The Advantages of Having a Closed Corporation Company

Individuals who wish to form a corporation will start by filing the articles of incorporation. This document often outlines the maximum number of shares of stock the business plans to sell to shareholders in exchange for ownership interest. In order to make decisions, the shareholders of a corporation must vote. However, owners of smaller businesses may not want to keep up with the many formalities and requirements that come with running a corporation. Forming a closed corporation can provide the benefits of this business entity type without as many requirements.

5 Advantages of Close Corporation Over a Partnership

Here are five key advantages that make a close corporation a favorable structure over a partnership, especially for small businesses seeking protection and stability:

  1. Limited Liability Protection
    Shareholders in a close corporation enjoy limited liability, meaning personal assets are protected from business debts and lawsuits. In contrast, general partners are personally liable for business obligations.
  2. Greater Operational Control
    Close corporations can eliminate or limit the role of a board of directors, allowing shareholders to directly manage the business. This setup mimics the informality of a partnership while retaining the legal protections of a corporation.
  3. Simplified Transfer of Ownership
    Shares in a close corporation are typically restricted but can be transferred under defined conditions, allowing for smoother ownership transitions. In partnerships, transfer of interest often requires the approval of all partners.
  4. Privacy and Confidentiality
    Unlike public corporations, close corporations are not required to publicly disclose financial information or management decisions. This privacy appeals to closely-held businesses with fewer owners.
  5. Business Continuity and Succession
    A close corporation continues to exist even if a shareholder exits or passes away, ensuring business continuity. Partnerships risk dissolution under such conditions unless otherwise stated in a partnership agreement.

These advantages explain why many entrepreneurs opt for a close corporation structure over a traditional partnership when long-term control, protection, and scalability are priorities.

Frequently Asked Questions

  1. What defines a close corporation?
    A close corporation is a private corporation with a limited number of shareholders and no public trading of shares. It combines the benefits of a corporation with the flexibility of a partnership.
  2. Can a close corporation be managed like a partnership?
    Yes. Close corporations often allow shareholders to manage the business directly without a board of directors, resembling the informal structure of a partnership.
  3. What are the limits on shareholders in a close corporation?
    Most states cap the number of shareholders at 35 for a close corporation, though this can vary by jurisdiction.
  4. Is a close corporation taxed like a partnership?
    Not by default. A close corporation is typically taxed as a C corporation but may elect S corporation status to achieve pass-through taxation similar to a partnership.
  5. Why choose a close corporation over a partnership?
    Close corporations offer limited liability, continuity, and flexible management while maintaining fewer formalities than larger corporations, making them a safer and more stable option than partnerships.

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