There are many different ways to set up a business with the smallest and the easiest of the structures being sole proprietorship where a single person is the owner of the business. When there are two people coming together to start a business, the business is said to be a partnership. There is another way of structuring a business, and that is corporation. A corporation is a common type of business entity that is unique in the sense that it is treated as a legal entity and taxed sued like individuals. There are many differences between a partnership firm and a corporation that will be highlighted in this article.
Partnership
Partnership is both a relation as well as type of business entity set up when two or more people carry a business sharing the profits and responsibilities. Partners contribute money to create the necessary capital to run the business and also make available labor and expertise, to carry on the business. These partners share the profits and losses depending upon their shares in the business. In a partnership firm, no income tax is paid, but individual partners have to declare their profits from the business and file their income taxes. Partnership firm has to declare its income and deductions.
Not all partnership firms have equal partners, and in many firms, there are senior and junior partners sharing profits and losses in accordance with their share in the business. However, from a legal point of view, all partners are treated as equals. In a partnership firm, there is a written document that covers the amount brought forward by each partner, the manner in which profits are to be shared, the roles and responsibilities of all partners, the mechanism for settlement of disputes, the system of salaries, and the mechanism of dissolution of the partnership business.
Corporation
A corporation is a business entity that is commonly set up to start a business. It is a unique business structure in the sense that it gets the same legal status and treatment as a person. In fact, the rights and privileges of a corporation are separate and distinct from those constituting and running it. This feature gives a limited liability to its members as the corporation deals with liabilities on behalf of its members.
There are three different types of corporations in US namely Close corporations, C Type Corporation, and S Type Corporation. While both Close, as well as C corporations, can issue stock, the number of shareholders is small in Close corporations, usually less than 30. The transfer and sale of shares is closely monitored in Close Corporations. In C Corporations, there is a small board of directors for the smooth running of the business. Here, the shareholders are required to pay taxes on the dividends they receive while the corporation is also taxed on its income. S Corporations have a special tax concession from the IRS as it is only taxed at the personal level while there is no income tax for the corporation as such.
What is the difference between Partnership and Corporation?
• The business ceases with the death of a partner whereas corporation continues as a business entity even after the death of a few members.
• There is legal immunity to members in case of bankruptcy in a corporation whereas members in a partnership firm have to face legal proceedings as they are liable for any losses, as well as profits.
• Tax structures are different for partnership and corporation businesses.
• There are partners as owners in partnership whereas there may be a small board of directors to run a corporation.
• No documents need to be filed to start a partnership firm while the articles to incorporate or form a corporation have to be filed.
• There is a fee to make a corporation that varies from state to state.
• Partners can lose their personal assets to cover for the losses to their partnership firm but members in a corporation have a limited liability, and the corporation has to be responsible for the losses.
• There are many differences in structure and formalities to be fulfilled in the case of a corporation and a partnership.