Should I Form a Partnership or a Corporation?

When choosing between forming a partnership or a corporation, there are many things to consider. Each business model has its own unique perks and disadvantages. The one you choose should be based on careful research and consideration of the type of business you are starting and the direction in which you hope to go. The main difference between a partnership and corporation is that the a partnership is owned by the people involved and a corporation is generally publicly traded and exists as its own entity.

Factors to consider before you choose between a partnership or a corporation include the benefits of each option along with the common disadvantages. The main perk of starting a corporation is that the company will stand as its own entity. This means that owners, or stockholders as they are called in a traded company, are not responsible for debt incurred by the business. For instance, if a corporation becomes seriously indebted, the collectors cannot go after individual stockholders. In a partnership, however, the business and owners are tied in together.

Corporations also do not have to pay the typical self-employment taxes that partnerships must pay. This means that if a corporation earns a certain amount of money, only the amounts paid in salary are eligible for taxation. Money considered profit is not held under the same tax laws, which often saves the business money.

Others things to consider when choosing between a partnership or a corporation are the benefits of a partnership. In general, partnerships cost a lot less to start than corporations. Corporations require filing fees, formation fees, and annual state fees. Partnerships, on the other hand, generally do not require the same level of licensing and filing requirements as a corporation does. This makes starting one both faster and less expensive.

There are also fewer legal formalities when starting a partnership. Common formalities of owning a corporation include holding shareholder meetings, forming and consulting with a board of directors, and reporting income statements and potential changes in policy for a vote. Partnerships do not have these formalities because the business is privately owned by the original partners.

As you continue to think about your decision between a partnership or a corporation, weigh all of these pros and cons of each option. If you intend to start a small “mom and pop” operation selling homemade goods or if you are starting an online business, you may choose to start a partnership to get things moving as quickly and inexpensively as possible. Larger operations may benefit from the protection and publicly traded funds a corporation has to offer. Oftentimes, owners will start their businesses as a partnership and incorporate at a later date as things grow.