Partnership and Corporation: Everything You Need to Know
A partnership is a business agreement in which two or more individuals agree to do business together and share the ownership.3 min read
2. What Is a Corporation?
3. Setting Up a Partnership or a Corporation
What is a partnership and corporation? A partnership is a business agreement in which two or more individuals agree to do business together and share the ownership, responsibilities, profits, and liabilities of a business, whereas a corporation is owned by shareholders and has specific legal rights and liabilities.
In a partnership, the business owners (partners) assume all risks of running the business, as well as sharing all benefits. A partnership is easier to set up than a corporation and has less paperwork, legal obligations, and tax requirements.
What Is a Partnership?
Why choose a partnership? There are a few situations to consider:
- The more partners involved, the greater capital the business will likely have to add into the business finances.
- A greater number of partners means that management responsibilities can also be more easily divided and can result in less personal responsibility.
- Different partners bring different skills and experience to the business. A wider perspective on business operations can mean a greater chance of success.
There are a few different types of business partnerships:
- General partnership,
- Limited partnership
- Limited liability partnerships.
In general, partners must adhere to the partnership agreement, and partnerships are typically more flexible in their operations than a corporation. Each aspect of the business must be transferred or sold individually.
Partnerships raise money from:
- Current partners
- New members
- A loan.
A partnership can be terminated by the decision of the partners.
What Is a Corporation?
Owned by shareholders, a corporation is a separate legal entity from its owners. A corporation may or may not operate for profit, and it has legal liabilities and right. If the corporation operates for profits, the profit is sent back into the business and then divided among shareholders as a return (dividends). In a corporation, the owners generally receive some legal protection. As a corporation has much paperwork, tax obligations, and legal requirements, it is more difficult to establish than a partnership. A corporation is formed under operational state laws using articles of incorporation.
There are a few different types of corporations, such as an S corporation, a C corporation, or a professional corporation. Each type of corporation will differ in terms of corporate ownership, taxation, and election:
- S Corporation: Forming an S corporation will allow you file taxes annually, as opposed to quarterly. In addition, you'll also enjoy the benefits of reporting your profit or loss share on your tax return as an individual.
- C Corporation: Forming a C corporation will allow you to attract wealthy investors interested in buying your company's share, as well as offering unlimited business growth and tax advantages
- Professional Corporation: Registering as a professional corporation is best for lawyers, medical professionals, engineers, and architects, as the structure will protect you from liability from malpractice claims.
Corporations are managed by a board of directors, and corporation members must act in line with the corporation's charter. As a result, they are less flexible and more structured than partnerships. However, it's generally easier to transfer ownership of a part of a corporation.
Corporations raise money by selling financial instruments such as bonds and stocks. In case of a fault, the corporation is held liable, as opposed to the stockholders. Corporations may be dissolved by either stockholder approval or government approval.
Setting Up a Partnership or a Corporation
In order to become established, both partnerships and corporations require legal paperwork.
A partnership business is generally easier to establish than the legal work required to set up an LLC or a corporation. You will need to write a partnership agreement, which all partners must sign, to avoid any potential of future conflict between business partners. The partnership agreement clarifies:
- The responsibilities and roles of each partner.
- The details pertaining to profit and loss disbursement among partners.
- Other crucial details.
Establishing a corporation requires more than one single contract or agreement. You'll need to write legal documents such as:
- Articles of incorporation
- Shareholder agreement
- Corporate bylaws.
If you're determining whether to establish your business as either a partnership or a corporation, an experienced business lawyer will be able to help you understand the difference between the two. In addition, a lawyer can help you ensure your legal documents are prepared without any flaws or overlooked details.
If you need legal help related to your business, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb