Starting your own business means making a ton of important decisions. One of the primary choices you have to make early on is how to structure your business.
Corporations and partnerships are two main ways to form a business with multiple owners. Each type has its own advantages and disadvantages depending on the details of your business plan. Keep reading to learn the differences between the two.
Corporations and Partnerships
The way you structure the business is important. It affects your taxes, how much personal liability you’ll have, and who is involved in making business decisions.
The following information will hopefully give you a good starting point. But, it may help to contact a business attorney when choosing between corporations and partnerships.
Partnerships
A partnership is a common type of business arrangement for business with 2 or more owners. It is a little less complicated than a corporation. The owners have personal liability in the business (this is different than a corporation).
This means that the owners share directly in the profits, but also in the liability if something goes wrong. If the business goes into debt and owes clients money, in a partnership the owners are personally responsible for the money. They could even be sued personally.
Groups of professionals working together often form partnerships because it is the simplest way to jointly own a business. They also are not concerned about stock price or dividends for shareholders since the money goes directly to themselves and their business.
When it comes time to pay taxes, partnerships are taxed as self-employed businesses.
The management decisions in a partnership are fairly straightforward. The group of owners (which is usually relatively small) comes together and decides the course of action. They are the ones that own and run the business.
Corporations
A corporation is also a way to organize a business with 2 or more owners, though they tend to be larger than partnerships.
Forming a corporation actually creates a new entity separate from all the individual owners. Shareholders are the actual owners of corporations.
So, the primary purpose is increasing shareholder wealth. These shareholders may or may not have much to do with the running of the business.
The individual shareholders or owners don’t have personal liability. Since the corporation is actually a legally separate entity, it can be sued and may owe money to clients, but the individual owners are not legally responsible.
A corporation can raise money by selling shares of stock, which is a great advantage. A major disadvantage is the idea of “double-taxation.” This means that the corporation itself is taxed on its revenue. Then, the money that individuals personally receive is also taxed as personal income.
In a corporation, the management is further removed from the owners. The shareholders elect a board of directors that runs the business.
Making The Right Decision
There’s a lot to think about when starting a business with multiple people, but make sure you start off on the right foot. Contact a business lawyer to give you peace of mind about making the right choice.
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