Benefits of a Close Corporation as Opposed to a Partnership
The benefits of a close corporation as opposed to a partnership include potentially lower tax rates, limited liability, and the option to sell stock.3 min read
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
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.
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.
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