Understanding the concept of a partnership company is critical when deciding on a business form for your firm.
Table of Contents
Partnerships
A partnership is a firm that is held by two or more people. Profits and losses (including liabilities) are split evenly between the partners. Partnerships, like sole proprietorships, are simple to establish and manage. However, the partners are individually liable for the partnership’s commercial obligations and liabilities. The partners may differ on how to operate the company, which might lead to disagreements and litigation.
Corporations
This is a form of corporate structure in which shareholders own the company. It is a different legal entity that is much more complicated to establish and manage than sole proprietorships and partnerships. Corporations are preferred by larger firms over other forms of company arrangements.
The restricted liability of a corporation’s stockholders is a significant benefit. Shareholders are not individually liable for the company’s obligations, and their losses are limited to the amount invested. By selling the shares, the business’s ownership stake may be transferred to others.
One of the most significant drawbacks of a company is the cost and complexity of establishing and operating it. Corporations are controlled by state laws, and as such, they must adhere to specified reporting and record-keeping methods and requirements.
One sort of company (subchapter C) pays income taxes on its profits. Dividends received by shareholders of a subchapter C company must also be taxed, resulting in double taxation.
Subchapter S corporations are another sort of corporation. Although more complicated than partnerships and sole proprietorships, this company form is less burdensome than a subchapter C corporation.
Establishing a Partnership
When two or more people decide to go into business together, they form a partnership. Before beginning company activities, the partners do not need to formally submit any documentation.
Creating a Corporation
To legally create a company in their state, business owners who want to incorporate must first submit articles of incorporation. They must register in each state in which they want to do business. Every state levies a cost for submitting articles of incorporation.
Taking a Chance
Individuals who create a partnership are personally liable for any debts acquired while running the firm. This implies that when creditors come knocking, their personal assets are at danger, and they may wind up losing their vehicles, houses, and other personal assets if the business’s assets are insufficient to satisfy its obligations.
Corporations, on the other hand, offer their owners with minimal liability protection in the event of a corporate obligation or debt. If the firm goes bankrupt, creditors cannot utilise the owners’ personal assets to satisfy corporate obligations. The corporation’s stockholders are solely responsible for company debts up to the amount of their investment.
Startup Expenses
Creating a corporation is more complicated and costly than forming a partnership. When forming a company, owners are required to:
Pay a variety of filing and administrative costs.
Maintain compliance with complicated legal and tax standards.
Owners of businesses must get the necessary municipal and state permissions and licences, as well as submit articles of incorporation.
Due to the complexities of forming a company, most owners opt to employ an attorney to assist them with the process. According to the US Small Business Administration, companies should be founded only by big established enterprises with several workers.
Taxation
Although partnerships do not pay company taxes, earnings are passed through to general partners, who declare the income on their personal tax returns and pay the corresponding taxes.
Corporations must pay federal and state taxes, while shareholders must pay taxes on dividends, bonuses, and wages earned.
Responsibilities in Management
Partnerships often have straightforward management systems. All business decisions and how the company is operated are made by the general partners. In most circumstances, the general partners are in charge of management.
A corporation’s governing body is made up of its shareholders. Ordinarily, shareholder meetings are held on a regular basis to deliberate on corporate policies and management. Although shareholders are not actively engaged in the company’s day-to-day operations, they are responsible for hiring and reviewing managers’ performance.