Updated October 28, 2020:

Partnership vs S Corporation

When comparing a partnership vs. S Corp, it's important to look at the pros and cons of each as you set up your company's legal structure. In addition to these options, other structures include C corporations, LLCs, and sole proprietorships. Of all of the available business entities, only corporations and LLCs are separate legal entities. Corporations are further split into two types: S Corp and C Corp. Both are clearly outlined and defined by the IRS tax codes.

One of the benefits of an S corporation is the fact that profits can pass through the business to the owners. Because of this benefit, many company owners opt for this legal structure. An LLC does have some advantages over an S corporation, so it's important to review these advantages before deciding on a business structure. Choosing to run your business as a partnership or an S corporation will come with several effects, especially relating to taxation and management.

If you're starting a new business or considering changing the structure of an existing business, the first step is often comparing S corps and LLCs. A partnership includes at least two people who operate a company together. An S corporation is an LLC or corporation that made a taxation election, allowing the business owners to have profits and losses pass through the business to them. They can elect this taxation while still taking advantage of the limited liability benefits.

LLCs and S corporations have several qualities in common, but they also have some specific differences. Before you decide which option is best for your business, it's important to understand those similarities and differences. A partnership is more information than an S corporation, but they share similar requirements in terms of taxation. Neither business structure has to pay corporate-level taxes on the business. A general partnership has an advantage over most other business types for startup companies because it is easier to organize. When companies grow and gain higher profits, tax advantages are more prevalent in an S corporation setup.

Partnership vs S Corporation: Formation

When you form a partnership, you don't have to file any forms or paperwork with the state. In fact, a partnership is created when two people work on a business together. You can form a partnership without much planning or intent to start a business. On the other hand, an S corporation will require more specific and complex steps to be formed and registered.

The first step is registering the business as an LLC or corporation within the state. In order to register, you will typically need to create articles or organization or articles of incorporation and file the document with the Secretary of State. The next step is completing and filing Form 2553 with the IRS, which elects S corporation taxation for the business.

Partnership vs S Corporation: Structure Flexibility

In order to register and operate as an S corporation, the business is required to elect a board of directors. The company must also allow the board to vote on any major issues that impact the company. A partnership or LLC can be run with the owners' majority vote or by a manager. If an LLC is manager-run, decisions can be made without requiring the approval or input from all LLC owners. With the flexibility of an LLC, it's easier to operate than it is to run an S corporation since big business decisions won't require multiple votes.

A partnership allows for more structure flexibility, both in terms of loss and profit allocations as well as in the management of the company. By default, all partners within the partnership have equal say in business decisions, without regard to the share of ownership. However, if the partners agree to a different arrangement, this would supersede the default. For example, all partners might agree that one of the partners would serve as the manager to handle all major decisions that impact the day-to-day for the company.

Additionally, partners can set up legal contracts that outline their shares of losses and profits, which are separate from the interest of ownership in the company. 

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