Starting a business involves deciding on a legal structure for the venture. Two common choices are a company and a partnership. Both types of legal structures have advantages and disadvantages, and understanding the key differences between these two is essential for entrepreneurs.
The Differences
The primary difference between a company and a partnership is that a company has limited liability, while a partnership does not. This means that if the company goes bankrupt, the shareholders’ liability is limited to the amount of money they have invested in the company. However, the partners in a partnership are personally responsible for any of the partnership debts and their personally owned assets may be forfeited should the business default.
Tax treatment of a company and a partnership also vary. With a company, the corporate tax rate applies, and any after tax profits which are distributed to shareholders are taxed as dividends. With a partnership, the profits of the partnership are allocated to each partner in their personal capacity and included in their individual income tax return
Management structure of a company and a partnership is another large difference. A company is managed and controlled by the board of directors, while the partners in a partnership are in charge of making decisions.
Another practical difference relates to the number of people involved. With a company you will require at least one shareholder and one director, who can be the same person but this is merely an
option. A partnership requires all partners to essentially act as both a shareholder and director, and will require a minimum of 2 partners. Having multiple people involved in a partnership may seem an advantage, but it also can be a disadvantage. Since all the partners need to agree on decisions, it can be difficult to reach a consensus and get things done. This is often a reason why some people opt to form a company.
A company also has the advantage of limited liability, while in a partnership, the partners are personally responsible for any debts the business incurs. However, the disadvantage of a company is that it is more complex to set up and requires a higher level of administration.
Another difference is the ease of transfer of ownership. In a company, ownership can be easily transferred through the sale of shares. In a partnership, transferring ownership is more complex, as it typically requires the agreement of all partners and the restructuring of the partnership agreement.
In terms of raising capital, companies have the advantage as they can raise capital through the sale of shares. Partnerships, on the other hand, typically raise capital by taking on new partners or taking on new debt.
Final Thoughts
Choosing the right legal structure for a business is an important decision that should not be taken lightly. It is important to carefully consider the advantages and disadvantages of each structure before making a decision.