Partnership vs. corporation: What’s the difference?

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Not every business has to play by the same rules. Depending on their classification as partnerships, corporations, organizations, or other types of entities may operate within different frameworks. The classification of a company can have a massive impact on the legal and financial obligations facing that organization. Navigating the differences inherent to each type of business is a job for financial professionals who have relevant degrees, such as a master’s in accounting. A Master of Accounting (MAc) education gives individuals a keen understanding of tax policy, one of the areas most impacted by a company’s classification.

A corporate accountant works with data

One of the major business structure divisions exists in the difference between partnerships and corporations. Both models have a unique approach to liability and taxation—each allows owners to raise funds in different ways. Selecting an appropriate model, keeping up with the relevant practices and shifting when circumstances demand a change are some of the responsibilities associated with optimizing a company’s structure.

Partnership business definition

A partnership is the default kind of limited liability company according to the Internal Revenue Service. Any firm formed by two or more people is a partnership unless the leaders actively seek to have it recognized as a corporation. The U.S. Small Business Administration explains that a partnership is less formal than a corporation, and may be a viable definition for founders who want to give a new business idea a trial run before expanding.

Limited partnerships and limited liability partnerships are the two main structures available for these businesses. A limited partnership means there is one primary owner of the company, with no limits on his or her liability. Limited liability partnership participants have limits on both their financial liability and their control. The general partner, or individual with the greatest degree of control, files taxes as a self-employed individual, and profits go to individual tax returns. In limited liability partnerships, all partners have an equal degree of liability protection, guarding them against negative financial results of actions by their fellows.

Flexibility is a key benefit of being defined as a partnership, according to the Journal of Accountancy. Partnership is open to any person or entity, ownership shares may be issued in more than one class, and property can often be issued to a partner in a way that is tax-deferred. The main drawbacks, the JOA notes, are the self-employment taxes and the added accounting steps that come with a flexible company structure.

Partnership business examples

The SBA points to partnerships as the ideal model for companies that have more than one owner, as well as groups testing out a company. Furthermore, professional groups that consist of equal partners in an enterprise, such as attorneys’ offices, may benefit from defining themselves as partnerships. In some cases, especially when a small company grows beyond its initial state, it may suit a partnership to apply for corporation status.

Corporation business definition

What is a corporation business? Corporations are companies that exist as independent legal entities, rather than being under the direct control of a person or partnership group. The SBA noted that creating a corporation insulates founders from financial risk in a way that not even a limited liability partnership can. Corporations pay taxes on their own income, and they allow shareholders to come and go, without much impact on their operations.

Selling stock is one of the major advantages of being a corporation, the SBA added. When corporate entities need to raise funds, they can announce a stock offering. Becoming a corporation is an important step on the road to becoming a publicly traded company or putting an organization up for sale to an acquirer.

There are multiple types of corporations. The default model is called a C corporation. A C corporation’s income may be taxed both when it is collected and when it is paid out as dividends. S corporations are a separate kind of company that prevents the double taxation. The SBA noted that these organizations are limited to fewer than 100 shareholders, not recognized in all states, and may pass profits and losses straight to personal bank accounts. These are just two of the varied models of corporations that exist in today’s business environment—each sub-classification has its own rules, advantages, and drawbacks.

Corporation business examples

The Journal of Accountancy noted that forming a corporation—notably on the S corporation model—has become the default posture for independent businesses to take. The SBA suggested a corporation model for organizations that expect to incur medium or high levels of risk. If losses do occur, shareholders may be relieved to see an independent entity taking the financial hit, rather than suffering the damage themselves. Furthermore, firms that want to issue stocks, be traded or sell their operations will lean toward corporation status.

Accountants’ and advisors’ roles

The JOA notes that there is a great deal of thought and planning required to maximize a company’s potential. While some organizations may thrive as S corporations, others are better suited to partnership models or a simple C corporation status. Determining the level of risk present, long-term goals of investors and founders and ideal taxation structure is an essential process early in an organization’s existence.

There’s no one universal answer to the question of corporation vs. partnership. Financial advisors should be able to assess an individual situation and point a way forward. Trained and educated financial professionals with a deep knowledge of corporate law and tax practices are needed as employees and advisors in today’s business world. These individuals may come to the field with information gained through advanced degree programs, such as the online Master of Accounting from the University of Alabama at Birmingham’s Collat School of Business. Seeking an online MAc is a way to acquire an up-to-date skill set with real value to today’s company founders, corporate shareholders and business partners.

Courses such as Corporate Governance and Business Law for Accountants equip graduates with the skill set they will need to deliver timely and precise insights to leaders searching for the best path forward for their companies.

Conveniently scheduled courses allow businesspeople to fit their further education alongside present responsibilities, enhancing their ability to help corporate clients navigate the complexities of current legal regulations. Learn more about an online MAc degree by reaching out to an enrollment advisor.

Recommended Reading:

Master of accounting online vs. on-campus learning

MAc vs. MBA with a finance concentration

Sources:

IRS – LLC Filing as a Corporation or Partnership

U.S. Small Business Administration – Choose a business structure

Journal of Accountancy – Choice of Entity: Benefits of a Partnership

Forbes – Should You Form An LLC Or An S-Corp, And What’s The Difference?