The benefits of a close corporation as opposed to a partnership include potentially lower tax rates, limited liability, and the option to sell stock.3 min read Show
1. Five Major Differences Between a Corporation and a Partnership The benefits of a close corporation as opposed to a partnership include potentially lower tax rates, limited liability, and the option to sell stock in exchange for ownership of the business to raise capital. Five Major Differences Between a Corporation and a PartnershipThere are five main differences between partnerships and corporations. The first is the structure of the business. A partnership and a corporation have different structures, with corporations involving more people in the process of making decisions and being more complex to set up. Corporations are legal entities that exist separately from their owners, called shareholders. The shareholders own the business and decide who is responsible for managing it, as well as how it will be run. Partnerships are business entities in which two or more people share ownership. In a general partnership, the two owners share:
In a limited partnership, the limited partners only serve as investors in the business, while the general partners take responsibility for owning and operating the business. The second main difference between the two entities is the cost for starting the business. A corporation is generally more complicated and expensive to form, often requiring the payment of complex tax and administrative fees. Corporations also have more stringent legal requirements. The first step in forming a corporation is filing the articles of incorporation with the secretary of state or other business agency in the area. Next, the owners must obtain all required permits and licenses to operate. Many corporation owners work with experienced business attorneys for assistance with starting this type of entity. Liability is another difference between partnerships and corporations. In a partnership, all general partners are personally responsible for legal requirements and company debts. A general partner's personal assets could be seized to pay for debts incurred by the company. A partnership agreement will usually outline the percentage of the company owned by each general partner, which can vary between them. A corporation comes with limited liability protection, which means that personal assets cannot be seized to pay for business debts. Corporations exist as separate legal entities from their shareholders, so the business itself is responsible for its own legal fees and debts. How the business is taxed is another aspect in which the two types of business entities differ. A partnership isn't a separate legal entity, so it doesn't pay taxes separately from its owners. Instead, all business losses and profits are passed through the company to the general partners. The partners must file all business profits and losses on their personal tax returns with the IRS. A corporation will pay taxes separately from its owners, including on the federal and state level, while shareholders pay taxes on their dividends, bonuses, salaries, and other payments received. This can be a benefit as the corporate tax is generally lower than the tax rate on individual income. The final difference is the management of the organization. A partnership can be run more simply than a corporation, with the partners deciding how the business will be run. A corporation comes with stricter structural requirements. In a partnership, the general partners will typically take on the responsibilities of managing the company, although they may choose to hire out the management tasks and monitor those they've hired to take care of these tasks. A corporation is run by the shareholders, who must meet regularly to go over policies and management decisions. A shareholder in a corporation isn't usually as involved with the day-to-day operations of a business, but rather will oversee the management team. The Advantages of Having a Closed Corporation CompanyIndividuals who wish to form a corporation will start by filing the articles of incorporation. This document often outlines the maximum number of shares of stock the business plans to sell to shareholders in exchange for ownership interest. In order to make decisions, the shareholders of a corporation must vote. However, owners of smaller businesses may not want to keep up with the many formalities and requirements that come with running a corporation. Forming a closed corporation can provide the benefits of this business entity type without as many requirements. If you need help with the benefits of a close corporation as opposed to a partnership, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb. Was this document helpful? Share it with your network! The Best Lawyers For Less Hire the top business lawyers and save up to 60% on legal fees Talk to a Top Lawyer for Free Content Approved Want High Quality, Transparent, and Affordable Legal Services? What are 5 disadvantages of corporation?Disadvantages of a company include that:. the company can be expensive to establish, maintain and wind up.. the reporting requirements can be complex.. your financial affairs are public.. if directors fail to meet their legal obligations, they may be held personally liable for the company's debts.. What are 3 disadvantages of a corporation?Before becoming a corporation, you should be aware of these potential disadvantages: There is a lengthy application process, you must follow rigid formalities and protocols, it can be expensive, and you may be double taxed (depending on your corporation structure).
What are some disadvantages of a corporation?The disadvantages of a corporation are as follows:. Double taxation. Depending on the type of corporation, it may pay taxes on its income, after which shareholders pay taxes on any dividends received, so income can be taxed twice.. Excessive tax filings. ... . Independent management.. What are the advantages and disadvantages of a partnership vs corporation?Advantages and disadvantages. |
