Partnership vs S Corporation: Everything You Need to Know
Partnership vs. S corporation is one comparison you should make when deciding on the right legal structure for your business. 3 min read
2. Partnership Versus S Corporation: Formation
3. Partnership Versus S Corporation: Structure Flexibility
Partnership Versus S Corporation
Partnership vs. S corporation is one comparison you should make when deciding on the right legal structure for your business. Other options include:
Among these options, only formation as a corporation or an LLC creates a separate business entity. S corporations and C corporations are defined and regulated by two different IRS tax codes. An owner of a business might opt to set up the company as an S corporation because of the benefit of pass-through taxation, which means that the business profits pass through the business to the owners. An LLC does have its own advantages over a corporation, so it's important to consider which will be best for your business.
The way you structure your business will impact a number of aspects, including how it is managed and taxed. For new business owners or existing owners considering a change to the business structure, the first step is often comparing S corporations and LLCs. A partnership includes at least two people who have started a business together. An S corporation is either an LLC or a corporation that has made an election for different tax treatment. This election allows the business owners to pass the profits through the business to themselves while maintaining limited liability.
Although there are some similarities between S corporations and LLCs, the two also have several major differences. It's important for business owners to consider the pros and cons of each before deciding how to structure the company. Although partnerships are less formal than S corporations, both structures offer the option to avoid being taxed on a corporate level. For startup business owners, a general partnership has an advantage because it is much simpler to start and organize. However, as a business grows and starts to have higher profits, the tax advantages are more prevalent in an S corporation structure.
Partnership Versus S Corporation: Formation
Creating and forming a partnership is so simple that you don't even have to file any type of paperwork. In fact, if you start working with another person to start a company, you will have created a partnership. This can happen even if you weren't intending to start a business. However, forming and registering an S corp comes with more extensive requirements.
The first step in forming an S corporation is registering within the state in which the company will operate. In order to do this, you will typically need to create Articles of Organization or Articles of Incorporation and file them with the appropriate state governmental agency. The next step is filing Form 2553 with the IRS, which elects for taxation as an S corporation.
Partnership Versus S Corporation: Structure Flexibility
S corporations are required to have a board of directors, which will vote on any issues that impact the business. Partnerships and LLCs are more flexible in terms of management; a manager can handle the operations, or the owners can require a majority vote. This added flexibility makes it easier to operate an LLC than an S corporation because the owners can decide whether a vote is required to make a major decision.
Partnerships are also more flexible in terms of allocations of profits and losses, as well as the company's structure. By default, all partners within a partnership have an equal say in the business, no matter how much of the company they own. However, a partnership can implement a different policy if all partners agree. For example, those in a partnership might determine that one of the partners is responsible for all day-to-day decisions and will serve as the managing partner. Additionally, partners can draft contracts that outline each person's shares of losses and profits, which may be different from the ownership interest in the business.
S corporation regulations are less flexible. The shareholders are required to elect a board of directors. The members of the board will oversee the company's management and appoint officers to handle the daily operations of the business. Additionally, the allocations of losses and profits within an S corporation are made based strictly on the number of shares owned by each shareholder. Neither the corporation nor the shareholders can make changes to the amounts.
If you need help with partnership versus S corporation, 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.