Corporation vs. Partnership: What Is the Difference?
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There are many different structures a business owner might choose from when starting their own business. Two common options include a partnership and a corporation. Learning more about these options can help you decide the type of business structure that's most effective for your goals and current situation. In this article, we discuss the key differences between a corporation vs. partnership, explore how to decide between them, and review the similarities between the two.
Corporation vs. partnership
Though they might share some similarities, there are several key differences between a corporation vs. partnership, including:
A partnership is a business structure where multiple people share ownership. This can be two or more people who decide they want to take the necessary legal steps to create a business. A corporation is an independent organization that has its own legal and financial structure. Rather than ownership and financial liability, shareholders are the people who technically own the business.
There are several different types of partnerships depending on the province in Canada, including:
General partnership: A general partnership is where the shared owners of a company have personal liabilities for the business and its debts. For example, if they have higher expenses than their revenue, they personally find solutions to pay the debt.
Limited partnership: Limited partnerships are arrangements where the general partners make the daily decisions and have liabilities for the debts, while limited partners own shares in the company without liability.
Limited liability partnership: Limited liability partnerships are when owners don't have liabilities for the business's debts. This is most common with particular business types, like doctors' offices, legal offices and accounting firms.
Similarly, there are a few types of corporations you might find, including:
Canadian-controlled private corporation (CCPC): CCPCs are private corporations residing in Canada whose owners aren't non-residents or public corporations. To fit this type of classification, the corporation cannot list its shares of capital stock for public trading.
Other private corporation: An other private corporation is similar in structure to a CCPC but also doesn't fall under the control of a Crown corporation.
Public corporation: A public corporation shares at least one class of its shares for public trading. To become public, the minister of National Revenue designates it as a public corporation with shareholder limitations.
Corporation controlled by a public corporation: This type of corporation is a subsidiary of a larger public corporation.
Other corporation: Other corporations are different from the other categories, including insurers or Crown corporations.
The operational structure of these two business types can vary greatly. For example, shareholders manage the overall decision making and strategies of a corporation. They might meet and decide on business decisions or team placements. For example, shareholders determine who to appoint as the executives for an organization who can help them implement their strategies. In a partnership, the shared owners determine the operational structure. They might serve as executives for the company, appointing other positions, like vice presidents, to help manage operations.
Depending on the location and size of the company, the prices for starting a corporation or a partnership can vary. Partnerships might be more cost-effective to start. They often have basic registration fees and can start quicker than corporations. As partnerships own the costs and liabilities for their own business, they may incur more debt during startup if they need loans or other funding for aspects like buildings or machinery. The different levels of corporations may have additional administrative costs along with legal requirements, especially as there can be many shareholders.
People involved in a partnership take responsibility for all the liabilities of a business. This means they handle the debts and legal liabilities for the company and its employees. For example, if an employee has an injury on the job, the partners have the legal and financial responsibility to handle any costs associated with it. This means that they may use their individual assets outside of the company if the business cannot cover costs.
Owners of corporations have limited liability for legal needs and costs for a company. As the business is a separate entity, the company holds all the responsibilities itself. This can appeal to shareholders, as it can minimize their risk in investment and ownership.
In a partnership, the partners share responsibilities for management or oversight. They might appoint themselves as executives, like chief executive officer or chief operating officer, and hire others to implement their business strategies. They might also hire executives and take on other managerial roles, supporting the executives and other leadership teams. Shareholders have limited responsibilities with daily operations management, even though they appoint leaders. For example, they appoint chief executive officers to handle the different business departments. They then have regular meetings where they discuss business performance and any leadership changes they might consider.
There are several requirements for each of these business structures around ongoing maintenance. Partnerships may file annual paperwork to ensure they still meet the legal and financial requirements for the business. Corporations require steady meetings among shareholders to ensure transparency about business strategy and performance. Corporations might also require several annual filings, depending on the location.
How to decide between a corporation and a partnership
Here are some steps you can follow if you want to start a business but are unsure which might be better for you:
1. Consider costs
Before you decide which to choose, it can help to evaluate the different costs associated with starting your own business. As corporations might cost more, you might consider a partnership to share some of the financial responsibilities of a new business. You can also evaluate if you might have extra early expenses, like leasing a building, new machinery, or distribution costs. If you have many people that hope to become shareholders in the company, you might consider a corporation to help with these costs.
2. Evaluate risks
Starting a business comes with several risks, so it can be important to evaluate these before starting. Partnerships have greater liabilities on your personal assets and finances, so this can be a greater risk. Consider evaluating if you have the proper legal support to address any issues that might arise when you start a business. With smaller ownership and governance, you might face fewer risks with management and operations if you start a partnership.
3. Determine business goals
There are many ways that a company can earn revenue and reach its business goals, so you can consider these before deciding which legal structure you might want. If you hope to earn more money through selling products and services, you might choose a partnership. If you think you can get more money and funding through investments and shareholders, you can consider a corporation. As you can have different classes of stocks to sell, this can be a good option if you hope to increase the value of the company through larger, shared ownership.
4. Consider support
Though you might hope to start a business on your own, it can help you to get support from several professionals. A financial advisor can help you evaluate your current financial situation and how you might adjust to business ownership. They can also tell you the best way you might get funding for the business when you start. You can also consider a legal advisor to ensure you meet all the legal guidelines needed to start and maintain a business.
Similarities between a partnership and corporation
Though there are several key differences between these two business structures, there are still some similarities. For example, you can still offer the same types of products or services in both business structures. You also might have a similar internal structure between both. For example, you might have executives, senior management, mid-level management and employees in both organizations, even if the executives might differ in each structure.
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