The great thing about starting your own business is that you are completely in charge of your own destiny. You can determine what service or product you will be providing, as well what type of consumer you will aim to reach. This sense of freedom contributes significantly to the overall appeal of entrepreneurship. The ability to forge your own path and create a livelihood for you and your family can be difficult to resist. Before you get your business venture off the ground, however, there are some fundamental business structures that you will want to acquaint yourself with. For example, you will want to know the differences between a partnership and a corporation.
How you ultimately decide to structure your business will depend on a multitude of factors. You will need to consider the goals of your business, the industry you are in, as well as any partners who may be joining you in your endeavor. By having an understanding of some simple business structure matters, you can make a more informed choice for your organization.
The Basics of a Partnership
In simple terms, a General Partnership (GP) occurs any time that two or more individuals go into business together. This can be centered around an informal arrangement that largely operates around a verbal agreement, or you can draw up legal papers for matters like profit-sharing. All partnerships are considered by the Internal Revenue Service (IRS) to be pass-through entities, which means that profits generated by the business pass through to the partners before they are taxed.
Unless you form a Limited Partnership (LP), or a Limited Liability Partnership (LLP), you will have unlimited liability. This means that you and your business partners will be responsible for any debts incurred by your business.
On a basic level, a partnership will not call for much paperwork. You may choose to draft a partnership agreement or obtain necessary business licenses, but beyond that, you are often in the clear.
What Makes a Corporation?
Unlike a GP, a corporation is its own legal entity. Because of this, owners–which are called shareholders–are shielded from personal liability for the business. This distinction is one that can make a corporation preferable to a partnership.
A corporation is, however, subject to much more rigidity in how it can be structured and managed. For example, you will need to appoint a board of directors, hold regular meetings for shareholders, and file annual reports. Creating a corporation will also merit a fair amount of paperwork. In your Articles of Incorporation (to be submitted to your Secretary of State’s office), you will need to include information about your business, your board of directors, as well as the number of shares that you will issue.
Corporations are not pass-through entities, and in some cases, they are taxed twice by the IRS–once in corporate taxes, and then again on shareholder income. An advantage that corporations have over partnerships is that they allow businesses to easily raise capital. Since ownership can be transferred through the issuance of stock, this can be a quick way to raise funds. Partnerships do not share this luxury and are often viewed as risky to investors.
Find Partnership and Corporation Documents Online
Whether you decide a partnership is right for you, or if a corporation makes more sense, we can help you make it official. At Corporation Center, we offer a wide array of online forms for business owners in all 50 states. Take a few moments to explore our site’s navigation, or contact us by email to learn more