Key Takeaways

  • Both partnerships and corporations are group-owned business entities, not individual ventures.
  • The main similarities of partnership and corporation include profit generation for owners, shared decision-making, legal recognition, and the ability to raise capital.
  • Both entities can sign contracts, own property, hire employees, and pay taxes under federal and state laws.
  • Partnerships are simpler to form, while corporations involve more legal structure and compliance requirements.
  • Both allow multiple owners to combine skills, resources, and investments, but they differ in liability, taxation, and governance.

Understanding the similarities of partnership and corporation is an important part of choosing a structure for your business. Basically, the only similarity between these entities is that they are both owned by groups of people instead of an individual.

Corporations vs. Partnerships

There are many different ways that you could structure your business, but two of the most popular options are forming either a corporation or a partnership. While these entities may seem similar at first glance, as their ownership is comprised of a group of people, they are actually very different, and it's important that you understand these differences before choosing a structure for your business.

The primary reason to structure your business as a corporation is that the owners, known as shareholders, are only responsible for the liabilities of the business under a limited set of circumstances. Partnerships, on the other hand, do not provide these liability protections. They are, however, much easier to establish than corporations.

In general, forming a corporation is much more beneficial than establishing a partnership, although there are some drawbacks to the corporate structure that you should keep in mind.

The legal structure that you choose for your business can impact several important issues:

  • The liability of your business's owners
  • The taxes that will apply to your business
  • How you will operate your business

Shared Features of Partnerships and Corporations

Although partnerships and corporations differ in liability protections and tax treatment, they share several important features that can influence a business owner’s choice:

  • Profit Sharing: Both structures distribute earnings to owners or shareholders. The distribution method differs, but the concept of profit allocation is common.
  • Legal Recognition: Both are recognized as legal entities that can enter into contracts, acquire property, and sue or be sued.
  • Multiple Ownership: Each allows more than one person to have an ownership stake, combining skills, capital, and labor to operate the business.
  • Management and Decision-Making: In both entities, owners have roles in influencing management decisions—directly in partnerships and indirectly in corporations through voting rights.
  • Growth Potential: Both structures provide opportunities for expansion. Partnerships may bring in new partners, while corporations issue shares to attract investors.

How to Create a Partnership

One of the primary reasons to structure your business as a partnership is that you will not need to follow a legal process to get your partnership started. If you own and operate a business with another person, you are automatically considered a partnership until you choose a different structure for your business.

You can form a partnership using only a verbal agreement. A written agreement, however, is usually the better idea, as it can help prevent disputes between you and your partner.

With your partnership agreements, you can outline important issues related to your business:

  • How you and your partner will make business decisions
  • What each partner will contribute to the business
  • How profits partners will divide profits

If you and your partner aren't interested in managing the day-to-day operations of your business, you have the option of hiring an outside manager.

Similar Tax Responsibilities

Both partnerships and corporations are subject to tax filing obligations, even if the way they are taxed differs. Partnerships file informational returns and pass profits through to partners, while corporations may face double taxation unless they elect S corporation status. However, in both cases:

  • Owners must report income on their personal tax returns.
  • Both entities must comply with IRS rules and state tax regulations.
  • Deductions for business expenses, such as rent, salaries, and supplies, are available to both.
  • Each structure requires organized financial records to remain compliant.

Forming a Corporation

When you form a traditional C corporation, you and your company are treated as legally separate. Large companies are the most common type of C corporation, although small two-person businesses can also choose this structure. If you're interested in forming a C corporation, there are several steps that you must complete. This is one of the biggest differences between corporations and partnerships.

The first thing you need to do to form your corporation is to choose a name for your company. Then, search your state's business name database to make sure your name isn't already in use. Once you've chosen a suitable name, you will need to register your corporation with your state by filing Articles of Incorporation. Finally, you will need to follow corporate formalities by holding regular meetings for your shareholders and your board of directors. With the largest C corporations, the board of directors usually handles management duties.

Common Operational Characteristics

Corporations and partnerships share operational features that make them function similarly in day-to-day business:

  • Employment: Both can hire employees and provide compensation.
  • Contracts: Each can legally enter into contracts in its own name.
  • Record-Keeping: Both require some form of accounting and documentation, though corporations typically have more stringent requirements.
  • Regulatory Compliance: Whether federal, state, or industry-specific, both entities must comply with applicable regulations to operate legally.

Advantages of a Corporation Over a Partnership

The most enticing benefit of the corporate structure is that company shareholders possess no liability for the company's debts. On the other hand, with a partnership, the business and its owners are not treated as legally separate, meaning owners are liable for business debts. If the partnership incurs debts and does not possess enough assets to cover these debts, creditors can pursue the owner's personal property.

When a corporation does not have the funds necessary to satisfy its debts, the owner's personal assets are usually protected from creditors. You should note that there are some cases where individual shareholders can be liable for the debts of the corporation. For instance, if a shareholder provided their personal guarantee toward a debt, they can be liable if the debt is not paid.

In some circumstances, the courts may decide that shareholders are responsible for the acts of the corporation. This practice is called piercing the corporate veil.

There are several reasons that courts may decide to pierce the corporate veil:

  • The funds of the corporation and those of shareholders have mingled.
  • The corporation has failed to follow corporate formalities.
  • The corporation does not have adequate insurance or capitalization.
  • The corporation has not paid its state taxes or has violated a law.

When Partnerships and Corporations Overlap in Benefits

Despite differences, there are situations where partnerships and corporations align in benefits:

  • Capital Raising: Both can attract outside investors—partnerships through admitting new partners and corporations by issuing shares.
  • Longevity of Business: Either structure can outlive the original founders if ownership interests are transferred properly.
  • Reputation and Credibility: Both structures can improve credibility with clients, vendors, and lenders compared to operating as a sole proprietorship.
  • Flexibility in Roles: Owners in both entities can take on management duties or appoint others to manage daily operations.

Frequently Asked Questions

  1. What is the main similarity of partnership and corporation?
    Both involve multiple owners combining resources and sharing profits.
  2. Can both partnerships and corporations enter into contracts?
    Yes, each has legal standing to enter contracts, hire employees, and own property.
  3. Do partnerships and corporations both pay taxes?
    Yes, though taxation differs, both must file returns and report income to the IRS.
  4. How do partnerships and corporations raise capital?
    Partnerships admit new partners; corporations issue stock or shares.
  5. Are partnerships and corporations legally recognized entities?
    Yes, both are recognized under state and federal law, granting them rights and obligations.

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