Partnership vs Corporation

Partnership and Corporation
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Abstract
Entrepreneurs have several choices to make when starting a business. One critical decision is the kind of business entity to form for the business. If there are two entrepreneurs starting a business, then they can choose either a partnership or a corporation. Choosing any of these entities has advantages and disadvantages. The best choice is influenced various factors such as taxation and state laws. A qualified attorney will be of help in making this decision. This article compares and contrasts a corporation and a partnership business entity in addition to the factors to consider when deciding on a business entity.
Keywords: business, entity, partnership, corporation
Introduction
Different kinds of legal entity chosen for a business have legal consequences. A partnership and a corporation are two different ways of running a business; deciding on the business format is determined by factoring the one that provides a better ta treatment according to the owners’ needs. This is not the only determinant though it is crucial when considering long-term profitability.
Contrasting tax treatments on corporations and partnerships
In partnership, two or more people own the business. In this case, the legal entity is not separate from its owners and therefore it is not the partnership itself that pays taxes. According to the Internal Revenue Service (IRS), the profits earned by the business go directly to the income of the owners.

The individual partners have the responsibility of paying self-employment taxes. On the other hand, a corporation is owned by shareholders and it’s separate from its owners. The corporations thus pay incomes taxes from the earned profits. The shareholders do not pay self-employment taxes (“Differences in a partnership”, 2018).
Another major difference between corporations and partnerships is being liable for debts. Since the entity is not separate from the owners in partnerships, the owners are liable for debts incurred. If the business fails, the partners are required to pay back the creditors. As opposed to a partnership, the shareholders in a corporation are not liable to debts; they are not held responsible for the corporation’s debts. The taxation for shareholders is also different. In stead, they pay taxes on the profits that the corporation distributes as dividends. Sometimes a shareholder sells shares in a company whose value has increased and if that’s the case then he ought to pay capital gains tax.
As per the IRS, the partners in a partnership are considered as self-employed and hence any compensation a partner may take is an advance against the profits. They have to pay self-employment taxes on the compensation. Shareholders of a corporation are comparatively seen as employees who are paid wages by the business. Their payroll taxes and wages are written off as business expenses. The benefits that shareholders receive are often deducted as expenses as opposed to partners.
Advantages of partnership over corporation
The shareholders of a corporation are subjected to double taxation. After receiving a dividend payment, a shareholder reports his payment on personal income tax return. Further, he has to pay tax on the distribution of individual tax. This does not happen to partners in a partnership business. This double taxation is one of the reasons why a business owner may prefer partnership to a corporation.
In partnership, there’s freedom of governance; the partners can decide on any kind of management. One of them can be the manager or both of them. Further, they can freely move assets in and out of the business. They can add their personal funds into the business at any time or take earnings from the business (“What Are the Benefits of a Partnership”, 2017). This is because they are the ones paying the taxes and can decide to take properties and other goods in and out of the business. In a corporation, the management is strict; any property or funds taken in and out of the business must be accounted for. The transfer of physical properties should be recorded on legal grounds.
Advantages of a corporation over a partnership
The greatest advantage of a corporation is the liability protection. When the business incurs debts, the shareholders are not at risk of losing their personal properties to pay off the debts. This is because shareholders are a separate legal entity from the owners of the business. In a partnership, the partners are responsible for the business’ debts and can lose their personal assets.
Corporations can easily access funds as compared to partnerships. They can raise money for expenses by selling stocks. Selling stocks is easier and faster than applying for loans. Partners have to find funds on their own or get loans whenever they need money (“The Advantages of a Corporation”, 2017).
There are also some that benefits that corporations enjoy which partnerships don’t. Taxes for the corporations are filed separately from the shareholders. Corporation owners are taxed on their earned wages, dividends, and bonuses. There are loopholes that make it easy for both the corporations and shareholders to pay taxes. Moreover, the corporate tax rate is often lower than personal income tax. As for partnerships, they pay taxes at rates depending on their profits.
Factors to consider when choosing a business entity
Liability protection: this is an important advantage in operating a business. The liability protection varies but owners often look for entities that can help them protect their personal assets. For instance, an entrepreneur may form a business entity and borrow money from the bank. In this case, the entity will be liable for the debts and not the entrepreneur as an individual. The entity is also liable for other arising liabilities such as accidents. Business insurance is, therefore, a necessary consideration.
Management: the management of a business determines its flexibility in income allocation as well as the movement of funds and assets. Some will freely allow movement of funds and assets while others have strict rules that restrict such movements. There are various ways of managing businesses like class ownerships or individual ownership. The levels of controls of the management also differ; others make decisions by voting while others decision-making may be vested in certain members.
Taxation: taxation among entities varies in its nature and extent. Entities such as corporations experience double taxation. For other entities, the owners are only taxed once in their personal income (Philip et al., 2015).
Business formalities: types of business entities have different ways in which they are authorized to operate. There are specific rules that define the authority and operation of an entity. The entity is the one that conducts business and not the owner; the owner must, therefore, understand his entity and the rules in which it is subjected to.
Obtaining capital. Different entities have different modes of capitalization. The owners may get loans from banking institutions, make contributions or sell shares to raise capital. There are rules that govern an entity’s acquisition of funds precisely with respect to loans or contributions.
Ownership transfer: business entities are owned differently. There are rules that define how an ownership interest is transferred. Transferring entity ownership to the next generation depends on the business’ management rules. The rules may involve estate planning issues.
Government programs: in some cases, the government has established payment limits or eligibility criteria for entities. It is thus important to evaluate government programs before choosing a type of business entity.
References
Differences in a Partnership and Corporation for Tax Treatment. 2018. Retrieved February 20, 2018, from http://smallbusiness.chron.com/differences-partnership-corporation-tax-treatment-20783.htmlWhat Are the Benefits of a Partnership Vs. an LLC or Corporation? 2017. Retrieved February 20, 2018, from http://smallbusiness.chron.com/benefits-partnership-vs-llc-corporation-3770.htmlThe Advantages of a Corporation Over a Partnership and Sole Proprietership. 2017. Retrieved February 20, 2018, from http://smallbusiness.chron.com/advantages-corporation-over-partnership-sole-proprietership-19197.htmlPhilip, L., Kunkel, S., Scott, W & Gray, P., (2015). Choosing the Right Business Entity, 2015: University of Minnesota.