1. Partnership vs S Corporation
2. Partnership vs S Corporation: Formation
3. Partnership vs S Corporation: Structure Flexibility 
4. Partnership vs S Corporation: Personal Liability
5. Partnership vs S Corporation: Tax Treatment

Partnership vs S Corporation

Partnership vs. S corp taxation plays a major role in how business owners choose to set up their companies. The business structure you choose will come with many effects, especially in terms of tax regulations and management rules. If you're starting a new business or considering a change to your existing business structure, one of the first steps you might take is comparing an S corporation to an LLC.

A partnership is at least two people who operate a business together. An S corporation is either a limited liability corporation (LLC) or a corporation that has elected for certain taxation regulations. Specifically, an S corporation has pass-through taxation, which allows the profits and losses to pass through the business to the owners. Along with this benefit, S corporation owners can also maintain limited liability. Although an S corporation and an LLC have some similarities, they are quite different. Before you determine which structure is right for your business, it's important to understand the differences.

A partnership is less formal than an S corporation, but they do have similar tax regulations and requirements that allow them to avoid paying corporate taxes. A general partnership is preferred by most startup company owners because it is easier to organize. When a company grows and starts to earn higher profits, tax advantages will be better with an S corporation setup.

Partnership vs S Corporation: Formation

When you form a partnership, you don't have to fill out or file any documents or paperwork with the Secretary of State. In fact, simply working with another person on a business venture will create a partnership by default, even if you didn't intend to start a business. 

However, an S corporation has more complicated requirements for registration. One of the first steps is registering in the state in which it will operate and do business. This registration will either be as an LLC or a corporation. In order to register, the owners will need to create articles of organization or articles of incorporation. The next step is filing Form 2553 with the IRS, which elects the business to be recognized as an S corporation.

Partnership vs S Corporation: Structure Flexibility 

A partnership is a more flexible business agreement, particularly related to loss and profit allocations and management options. By default, all partners involved will have equal say in the matters of the company, regardless of how much of the company they own. However, partners can create their own agreement that is different from the default. For example, partners might decide that one of the partners will serve as the manager in charge of all decisions that impact the day-to-day of the company. 

Additionally, partners can create contracts to specify shares of losses and profits, which would be separate from the partners' ownership interest. S corporations are less flexible. In order to set up a business in this way, the shareholders of the company must elect a board of directors. The board is responsible for managing the company, as well as appointing officers. The officers of an S corporation will oversee the daily operations of the business.

Additionally, allocations of an S corporations' losses and profits are required to be made based on the number of shares owned by each shareholder. No changes may be made to these allocations.

Partnership vs S Corporation: Personal Liability

A general partnership is a bit more concerning because all partners are exposed to the risk of unlimited personal liability. Every partner is jointly liable for any business debts. For example, if a partner within a partnership was to get into a car accident while on a business outing, and the partnership was found to be liable for the damages, any of the other partners could lose their personal assets if needed to satisfy the demands of the judgment.

The owners of an S Corp have the benefits of limited liability. This means that personal assets generally aren't at risk of being seized to recoup business losses or debts.

Partnership vs S Corporation: Tax Treatment

Members in a partnership earn self-employment income according to the IRS. As a result, every partner must pay their own income taxes and self-employment taxes.

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