Every business requires a legal structure, and each structure offers its own advantages. Setting up your company as a corporation, such as a C corporation, protects your personal assets from business liability. A partnership doesn’t offer that protection, but it’s much simpler to institute from a legal perspective.
Creating a Partnership
You don’t need any legal process to create a partnership. If you and someone else co-own a business, it’s automatically a partnership unless you and your co-owners specifically decide on some other structure.
Unlike other jointly owned businesses, you can set up a partnership by an oral agreement. A written partnership agreement works better, however. Putting the terms in writing settles disputes when memory fails. It also forces you to consider specifics such as how you’ll make business decisions, what each of your contributes to the firm, and how you divide up profits. You and your partners make the management decisions, though you can hire someone to run the firm for you.
Starting a Corporation
When you create a C corporation you create a separate legal entity from yourself and the other founders. The biggest of businesses are usually C corporations, but even a two-person business can exist as a C corporation.
Unlike a partnership, there are multiple steps you must take to set up a C corporation. Search your state’s database of corporate names to confirm the one you want isn’t taken already. Then, file articles of incorporation with the state government. After that, hold formal board and shareholder meetings regularly. With large corporations boasting multiple stockholders, an elected board usually takes over the management responsibilities.
Tax Tip:
There are several special forms of these business structures such as S corporations and limited partnerships. If a regular general partnership or C corporation doesn’t quite fit your needs, it may be worth researching alternatives.
Comparing Partnerships and Corporations
Legal Liability
Owners’ liability is a major difference between the two business forms. If someone sues a partnership, the partners’ personal assets are vulnerable along with their business investment. Incorporating protects personal assets. In most cases, shareholders are shielded from paying lawsuits and business debts.
Financing
Both partnerships and corporations rely on funding from their owners to get started. In a partnership, the different partners each contribute a certain amount. Corporations can sell stock, which gives the shareholders ownership rights.
Taxes
A partnership doesn’t pay income tax as a business, though it does file a tax return. The partners take their share of corporate profits and report that as personal income on their individual tax returns.
A corporation, as a separate individual, pays its own taxes, which can be quite complicated. Owners also pay taxes on any dividends they receive.
