Partnership vs. Corporation

      It is not surprising that many people want to start their own business these days. The first problem they meet is which type of company they should register. Some people prefer to start with a partnership, while other people like a corporation better. However, no matter which type you choose, it should be the most appropriate one for your business. So it is necessary to learn the differences partnership and corporation before you make your final decision.

1. Income Taxes

A partnership is not taxed as a separate entity. Actually, since the profit of the business is shared by each partnership as their personal income, the tax for business is already calculated in partners’ personal income taxes.

On the other hand, a corporation must pay income taxes as a separate entity every month. Moreover, shareholders don’t need to pay personal income taxes for their capitals in business unless they receive dividends.

Generally, the tax rate for companies, especially small businesses, are lower than the rate for individuals, which means the tax for corporations can be less than for partnerships.

2. Management of Business

A partnership has the characteristic of Mutual Agency. So each partner has the right to make his own decision on the development of the business. Also, the decision cannot be canceled by other partners, as long as it is appropriate for the partnership.   

Differently, when it comes to a corporation, the structure of the company is more complicated. Although shareholders are legal owners of the business, they do not directly manage the corporation. Instead, they hire the board of directors to make decisions for their business. Meanwhile, only common shareholders have voting right in the election of the board of directors. 

3. Division of Profit

      In the term of a partnership, partners share all profit or loss of the business based on their profit and loss ratios. If the ratio is not specified, the profit or loss will be divided equally to every partner.

However, in a corporation, the profit is given to shareholders in the way of dividends. To protect the rights of creditors, a part of capital called retained earnings is kept in the business instead of sharing by shareholders. In addition, preferred shareholders received dividends earlier than common shareholders.