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Partnership vs. Corporation: Key Differences and How to Choose

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A partnership is the default business structure for a company with multiple owners. In a partnership, co-owners report their share of the business’s income and losses on their personal tax returns. A corporation, which is formed by filing articles of incorporation, is a legally separate business entity owned by shareholders. An elected board and board-appointed officers manage the corporation.

When deciding on a business entity structure, many small business owners find themselves having to choose between a partnership vs. corporation. The choice will have important implications for your legal exposure, management structure and, ultimately, your bottom line.

Partnership basics

A partnership is a business that’s jointly owned and run by multiple people. If you start a business tomorrow and share the responsibilities with one or more other people, you’d by default have a partnership unless you specifically choose a different structure, such as an LLC or corporation.

A partnership is a pass-through entity. This means that there’s no business income tax on a partnership. Instead, co-owners report their share of the business’s income and losses on their personal tax returns and pay their personal income tax rate.

There are three primary types of partnerships:

General partnership

A general partnership is the most common type of partnership, in which co-owners are personally liable for the business’s debts and obligations. For example, if a client gets injured on business property, they can lay claim to the business assets and the owners’ personal assets as payment for their injuries.

Limited partnership

In a limited partnership, there are two classes of partners. General partners are responsible for day-to-day business and personally liable for the company’s debts and obligations. Limited partners invest money in the business but don’t take part in day-to-day decisions. Their liability is limited to the size of their investment.

Limited liability partnership

limited liability partnership is a special type of partnership typically reserved for law firms, doctor’s offices, accounting firms and other professional service businesses. Co-owners in an LLP are not personally responsible for the business’s debts.

The key difference among these three types of partnerships is the extent of personal liability for business debts. In a general partnership, co-owners are personally responsible for business debts. In an LP or LLP, co-owners are shielded from personal liability.

Tax treatment is the same across partnerships. There’s no such thing as a business tax on partnerships. All three types of partnerships are pass-through entities in which owners report their share of business income and losses on their personal tax returns.

Corporation basics

A corporation is a separate legal entity. The only way to establish a corporation is to file formation paperwork with the state. The owners, called shareholders, are not personally liable for the debts or obligations of the business.

An S-corporation and C-corporation are the two main types of corporations:

C-corporation

The traditional type of corporation that’s subject to a corporate income tax. With C-corporations, shareholders also pay personal taxes on any dividends they receive. A C-corp can have an unlimited number of shareholders and multiple classes of stock.

S-corporation

Corporations can elect to be taxed as an S-corporation, which, like a partnership, is a pass-through entity. Shareholders in an S-corp report the business’s income and losses on their personal tax returns. An S-corp is limited to 100 individuals shareholders and one class of stock and all shareholders must be U.S. residents.

The management structure is similar in an S-corp and C-corp. Shareholders own the company and they elect a board of directors to make strategic decisions. The board appoints officers — like a CEO or CFO — to run the business on a day-to-day basis.

The difference in the two types of corporations is tax treatment and the number of shares you can issue. In an S-corp, you’re limited to 100 shareholders and one class of stock. In a C-corp, you can issue unlimited shares and classes of stock, making it the structure of choice for firms that want to raise money from investors by selling equity.

Key differences between partnership vs. corporation

Your choice between a partnership and corporation will affect your taxes, liability, access to capital and management structure. If you are still undecided on which business structure to choose, take some time to understand the major differences between a corporation and a partnership.

Here are the main differences between a partnership and corporation:

Partnership

Corporation

S-corporation

Business license + DBA + partnership agreement.

Articles of incorporation, corporate bylaws, shareholder agreement, stock certificates.

Articles of incorporation, corporate bylaws, shareholder agreement, stock certificates, IRS Form 2553.

Two or more people.

One or more people, no more than 100 shareholders.

One or more people, unlimited shareholders.

Personal taxes.

Personal tax + corporate income tax.

Personal taxes.

Unlimited personal liability, except for LPs and LLPs.

No personal liability.

No personal liability.

Ongoing costs and maintenance

Annual tax or filing fee (in some states).

Regular board meetings, shareholder meetings, record maintenance, annual report.

Regular board meetings, shareholder meetings, record maintenance, annual report.

Formation

One key difference between partnerships and corporations is the startup phase. Starting a partnership is easier, less time-consuming and less expensive than starting a corporation. To start a general partnership, as with any business, you may need to file for a business license or fictitious business name. But other than that, you don’t really need anything else to get started. It’s a good idea to have a partnership agreement to outline each partner’s rights and responsibilities, but not legally required.

Starting a corporation, on the other hand, requires you to check off several boxes. Along with any necessary business licenses, you have to prepare several incorporation documents, including articles of incorporation, corporate bylaws, a shareholder agreement and stock certificates. To elect S-corp status, you need to file IRS Form 2553.

Note that starting an LP or LLP is costlier and more complicated than a general partnership, but usually, a partnership requires a much smaller investment of time and resources upfront.

Ownership and management structure

As you can probably tell by now, the ownership and management structure of a partnership and corporation also varies significantly. In a partnership, each partner typically brings a complementary skill set to the table. For instance, one partner works on customer acquisition and the other on technical needs. Whatever the division of work is, though, the partners actively run and manage the business together.

A corporation has more layers of ownership and management. Shareholders collectively own the business, but don’t directly engage in company decision-making. Instead, shareholders elect a board of directors to make major strategic decisions, such as whether to target a new audience or change a company-wide policy. The board appoints officers — such as the CEO, CTO and CMO — to run the organization on a day-to-day basis.

Even more importantly, a corporation has the ability to issue stock and easily transfer pieces of ownership in the company to third parties. This makes corporations the preferred business structure of most investors. In particular, investors like C-corporations because they can purchase preferred stock in your business. As your company grows, stock will increase in value and the investor can earn a nice return on their investment. In a partnership, there isn’t a similar item of value that you can easily exchange for an investor’s money.

Taxation

The next difference between a partnership and corporation is taxes. Most people place greatest emphasis on taxation because of the direct impact to a business’s bottom line. A partnership is simpler from a tax perspective, whether you have a GP, LP or LLP. Business partners simply file Schedule K-1 along with their personal 1040 tax return. Schedule K-1 lists each partner’s share of the company’s income, losses, credits and deductions.

A corporation’s tax status depends on whether you’re structured as a C-corp or S-corp. You might have heard of the term “double taxation” with regards to C-corps. This refers to the fact that C-corporations pay a corporate income tax and then shareholders have to also pay personal capital gains taxes on any dividends they receive from the company. An S-corp is a pass-through entity like a partnership, and isn’t subject to a corporate tax.

Legal exposure

One of the biggest benefits of a corporation when talking about a partnership and corporation is that a corporation is a separate legal entity. Creditors and legal claimants can only come after your business assets, not your personal assets (though personal assets are always fair game if you’ve signed a personal guarantee on a loan). That can provide a big sense of relief, especially if you operate in a higher-risk industry, like construction or shipping.

A general partnership leaves you open to personal liability for business debts or business lawsuits. Limited personal liability is available to limited partners in an LP and to all partners in an LLP, but those aren’t suitable arrangements for all types of businesses.

Ongoing costs and maintenance

With partnerships, ongoing costs and maintenance requirements are minimal. Some states, including California and New York, charge an annual tax or annual filing fee. But other than that, there’s really not much in the way of paperwork that you need to file.

In contrast, corporations are highly regulated. You need to have regular board and shareholder meetings, document meeting minutes and maintain records of important resolutions. Corporations also have to file an annual report documenting their activities over the previous year.

How to choose between partnership and corporation

The five differences outlined above should help you decide between a partnership and a corporation for your business structure. Ultimately, you can distill the decision down to three things — your tax bill, your preferred method for raising capital and your appetite for legal risk.

Minimize your tax bill

It’s not possible to say that a certain type of business structure guarantees lower taxes. There are too many business-specific variables — such as your exact income level, business expenses and deductions — that affect your final tax burden. The Trump tax reform bill cut the tax rate for C-corporations to a flat 21%. It also lets pass-through entities, like S-corps and partnerships, deduct 20% of their business income before calculating taxes. An accountant or tax lawyer will be able to crunch the numbers with you and figure out which is the better option for your company.

A C-corporation is subject to double taxation, meaning they pay a flat income tax rate of 21%, and shareholders are taxed on their personal tax returns when profits are distributed as dividends. However, a C-corporation but also enjoys more tax savings than other types of businesses. For example, a C-corporation can more easily shift income around to different fiscal years. Also, a C-corporation can deduct payroll taxes and 100% of fringe benefits given to employees.

“In my previous company that I founded, I elected to organized as a C-corporation,” says Michael Osteen, chief investment strategist at Port Wren Capital, LLC. “The C-corp not only provided legal protection, but also reduced my tax liabilities. For example, the amount you can allocate to your retirement account is much higher and the corp can write it all off. Any bonuses are deductible. You can deduct your medical insurance expenses as a corp and deduct the part of FICA that the corp pays. The wages paid to your employees are deductible. All in all, the corp provides a better tax shelter.”

Consider how you want to raise capital

Raising money has a lot to do with what type of business structure you choose. If you have your own savings or plan to raise money through business loans, then any business structure will work.

However, if you want to raise money from investors, a corporation is the better choice and might even be required. Many angel investors and venture capitalists won’t invest money in a business unless they can receive stock in a corporation in exchange for their support. Stock is the reason that investors can make 20x to 40x returns on their initial investment.

Weigh your appetite for legal risk

Some entrepreneurs are more open to taking risks than others. If you have a general partnership, you need to realize that your personal assets — like your car, home and personal bank accounts — are open to creditors of the business. This might not be a scary proposition when you’re first starting out and don’t yet have a steady revenue stream. But once they start making a significant amount of money, most business owners protect themselves by establishing a corporation.

Of course, the trade-off is that it’s costlier and more time-intensive to create and maintain a corporation. But for most entrepreneurs, the cost and time involved are worth the peace of mind.

“Partnerships typically have very simple management structures. In a general partnership, partners typically make decisions based on majority vote based on share of ownership,” says David Reischer, attorney and CEO of LegalAdvice.com. “Also, partnerships have no formal requirement to have regular meetings and therefore the administrative operation of a partnership is relatively easy to run. That said, our online business is set up as an S-corp, which offers protection of personal assets of our shareholders. A shareholder is not personally responsible for the business debts and liabilities of the corporation.”

Once you decide, set up your partnership or corporation

Once you decide between a partnership or corporation, it’s time to actually set one up! To form your partnership, contact your state’s or city’s business filing department and find out if your industry requires a business permit. You’ll also need to file a doing business as/fictitious business name if you’re operating under a trade name.

For a corporation, you’ll need to get started by filing articles of incorporation. After that come your corporate bylaws, stock certificates and shareholder agreements. Most small business owners use an online legal service like LegalZoom or hire a business attorney to help them comply with corporate formalities.

A version of this article was first published on Fundera, a subsidiary of NerdWallet.

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4 Tips for Starting an Industrial Business

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The industrial sector is a broad category that covers businesses involved in the manufacturing, production, and distribution of goods. Small industrial companies are growing across the country and there are many opportunities for entrepreneurs to get involved in this sector.

As with any type of business, there are certain things you need to do to set yourself up for success. Here are four tips for starting an industrial business:

photo credit: Pixabay

1. Do Your Research

Market research means figuring out who your target customers are and what they want or need. There are a number of different ways to do this, but some of the most common include surveys, interviews, focus groups, and observation.

Surveys can give you a good overview of customer opinions while interviews or focus groups can help you to delve deeper into specific issues. Observing potential customers in their natural environment can also be helpful in understanding their behavior and needs.

2. Choose the Right Niche

When it comes to starting an industrial business, one of the most important decisions you’ll make is choosing the right niche. There are a number of factors to consider when making this choice, and it’s important to do your research before settling on a particular industry.

First, you’ll need to identify the needs of your potential customer base, such as the products or services they need. Once you have a good understanding of the market, you can then start to narrow down your options. Consider the competition in each niche and decide which one offers the best opportunity for success. When making your final decision, it’s essential to choose a niche that you’re passionate about.

3. Create a Business Plan

In today’s competitive marketplace, it’s more important than ever to choose the right niche for your industrial business. When you specialize in a specific industry or type of product, you can better meet the needs of your target market and stand out from the competition. How do you know what niche is right for your business? Here are a few things to consider:

First, think about your strengths. What does your company do better than anyone else? What unique skills or experience do you bring to the table? Use these strengths to narrow down your focus and choose a niche that you’re passionate about.

Next, consider your target market. Who are you trying to reach with your products or services? What needs do they have that you can address? When you choose a target market and understand their needs, you’ll be better able to choose a niche that meets their demands.

Finally, don’t be afraid to experiment. Trying new things is essential for any business, so don’t be afraid to test out different niches to see what works best for you. By keeping these tips in mind, you can be sure to choose the right niche for your industrial business.

Engineers work with industrial printer

4. Optimize Your Processes

Through industrial control engineering, you will be able to identify opportunities for improvement and design solutions that achieve the desired results. In many cases, these solutions involve the use of automation and other advanced technologies.

By optimizing industrial business processes, industrial control engineers can help to improve efficiency and increase productivity. In addition, they can also help to improve safety conditions by reducing the potential for accidents. As industries continue to grow and become more complex, the demand for qualified industrial control engineers is likely to increase.

Endnote

With an increased demand for industrial operations and manufacturing, there has never been a better time to start an industrial business. By following these four tips, you can be sure to set your business up for success.

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How to Find the Right Business Coach — and Avoid the Wrong One

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At its best, business coaching can connect you with a mentor and supporter who helps you generate ideas, make plans and execute on them.

But at its worst, a business coaching offer can cost you time, energy and money — without much to show for it.

Here’s what to expect from a business coach, how to find a coach that suits you and how to spot red flags.

What a business coach can do

Business coaches draw on their professional experience to help you set and achieve your own business goals.

“I’m here to help you, and I’m here to raise your level of knowledge in whatever way I can,” says Gary Robinson, who chairs the Memphis, Tennessee, chapter of SCORE. SCORE offers free business mentoring for entrepreneurs nationwide.

Some ways a business coach or mentor might do this include:

  • Offering feedback on your ideas and suggesting new ones.

  • Giving you templates and other tools that help you make plans.

  • Connecting you with resources in your region or your industry.

  • Giving you deadlines and holding you accountable to them.

Some business coaches may also offer coursework or group training sessions on particular topics, like sales.

Working with a coach should help you identify opportunities you hadn’t seen before or develop new strategies for pursuing those opportunities, says Sophia Sunwoo, who coaches women and nonbinary entrepreneurs through Ascent Strategy, her New York City-based firm.

“[Coaches] don’t necessarily have to have all the answers,” Sunwoo says. “But they are the people that know how to maneuver and create a bunch of different thinking paths for their clients.”

What a business coach can’t do

A business coach isn’t the same as a consultant, whom you would hire to perform a specific task. A coach or mentor could look over your business plan, for example, but they wouldn’t write it for you.

“If you were to hire me as a consultant, you would expect me to roll up my sleeves and pitch in and work with you to get things done, and you would pay me for that,” Robinson says. Coaches, on the other hand, “try to show you how to do things so that you can do them [yourself].”

Business coaches are also not therapists, Sunwoo says. Entrepreneurship can be emotionally and mentally taxing, but it’s important that coaches refer clients to mental health professionals when necessary.

Business coaching red flags

If a business coaching opportunity “promises guaranteed income, large returns, or a ‘proven system,’ it’s likely a scam,” the Federal Trade Commission warned in a December 2020 notice.

In 2018, the FTC took legal action against My Online Business Education and Digital Altitude, which purported to help entrepreneurs start online businesses. The FTC alleged these companies charged participants more and more money to work through their programs, with few customers earning the promised returns.

In both cases, these operations paid settlements, and the FTC issued refunds to tens of thousands of their customers in 2021 and 2022.

To avoid offers like these, the FTC recommends that you:

  • Be wary of anyone who tries to upsell you right away or pressures you to make a quick decision.

  • Search for reviews of the person or organization online.

  • Research your coach’s background to see if they’ve accomplished as much as they say.

Sunwoo says to also be skeptical of one-size-fits-all solutions. A coach should customize their advice to your personality and skill set, not ask you to conform to theirs.

“The moment that a business coach pushes you to do something that is really not compatible with your personality or your beliefs or values,” Sunwoo says, “that’s a huge problem.”

How to find the right coach — maybe for free

Here’s how to find a coach that will be as helpful as possible.

Determine whether you need advice or to hire someone. A coach isn’t the right fit for every business owner. If you need hands-on help organizing your business finances, for instance, you may need a bookkeeping service or accountant. And take legal questions to an attorney.

Seek out the right expertise. A good coach should be aware of what they don’t know. If they’re not a good fit for your needs — whether that’s expertise in a particular industry or a specialized skill set, like marketing — they might be able to refer you to someone who’s a better fit.

Consider free options. There may be some in your city or region:

  • SCORE offers free in-person and virtual mentoring in all 50 states, plus Guam, Puerto Rico and other U.S. territories.

  • See if your city has a Small Business Development Center, Veterans Business Outreach Center or a Women’s Business Center. All are funded by the U.S. Small Business Administration and offer free training and advising for entrepreneurs.

  • Do an online search for city- or state-specific programs. Philadelphia, for example, offers a business coaching program designed for entrepreneurs who want to qualify for particular business loan programs. Business incubators often offer courses or coaching.

Make sure your coach is invested in you. They should take the time to learn about you, your business and its unique needs, then leverage their own experiences and creativity to help you.

“I’m on your team now,” Robinson says of his clients. “Let’s do this together and make this a success.”

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Are There SBA Loans for the Self-Employed?

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Many of the same SBA loans are available to both self-employed people and more formally structured businesses, such as limited liability companies and corporations. However, self-employed individuals, like sole proprietors and independent contractors, might face a higher barrier to entry for having limited credit history, inconsistent revenue or no collateral. If they can’t qualify for an SBA loan, other business financing options are available.

Who qualifies as self-employed?

Sole proprietors, independent contractors and partnerships all fall under the self-employed category. In these cases, there is no legal distinction between the business owner and the business itself. Sole proprietors, for example, are solely responsible for their business’s gains and losses, while LLCs and corporations are legally distinct from their owners. This distinction helps protect the owners’ personal assets if their business runs into legal or financial issues.

Are self-employed SBA loans hard to get?

While a sole proprietorship is much easier to set up than an LLC or corporation, lenders may be more hesitant to finance them for a few reasons:

  • Self-employed business owners are legally responsible, as individuals, for any debt and liabilities that their businesses take on. If someone sues their business, for instance, their personal assets — not just their business — could be at stake. This makes it riskier for lenders to finance them.

  • Sole proprietorships and independent contracting businesses may have lower revenue or less collateral to offer since they’re often a business of one. This could make it more difficult for them to prove that they can pay back the loan, plus interest. And it may require more paperwork.

  • Some banks set lending minimums that surpass what a self-employed business owner is looking for, either because the business owner doesn’t need that much funding or doesn’t qualify for it.

  • Since there is no legal distinction between the self-employed business owner and their business, they may lack business credit history. To establish business credit, you’ll want to register the business, obtain an employer identification number and open a separate business bank account and credit card to keep your business and personal finances separate.

SBA loans for the self-employed

SBA microloan: Best for small loans and more lenient requirements

Applying for an SBA microloan is a great option for self-employed business owners, especially if they’ve been turned down by traditional banks and don’t need more than $50,000 in funding. In fact, the average SBA microloan is around $13,000, according to the SBA. SBA microloans are administered by nonprofit, community-based organizations that can also help train applicants in business practices and management. And because the loans are small, the application process may be easier — applicants may have limited credit history and typically don’t need as high of a credit score as they do for an SBA 7(a) loan.

SBA 7(a) small loan: May not require collateral

Funds from the SBA’s most popular 7(a) lending program can be used for a variety of business-related purposes, such as working capital or purchasing equipment. While the maximum SBA 7(a) loan amount is $5 million, SBA 7(a) small loan amounts don’t exceed $350,000. And if the 7(a) small loan is for $25,000 or less, the SBA doesn’t require lenders to take collateral.

SBA Express loan: Best for quicker application process

SBA Express loans are a type of 7(a) loan for businesses that need quick financing and no more than $500,000. The SBA responds to these loan applications within 36 hours as opposed to the standard five to 10 days, which may speed up the process for borrowers working with non-SBA-delegated lenders. Additionally, borrowers might not have to fill out as much paperwork — the SBA only requires Form 1919. Beyond that, lenders use their own forms and procedures.

SBA loan alternatives

Online lenders

Self-employed business owners turned down for SBA or traditional bank loans may be able to qualify for financing with an online lender. These lenders offer options such as term loans and lines of credit, and they often process applications faster and have more lenient requirements. However, applicants should expect to pay significantly more in interest than they would with an SBA loan.

Business credit cards

Not only can business credit cards help build your business credit history and pay for everyday business purchases, but they can also help finance larger purchases (within your approved credit limit). And if you qualify for a credit card with a 0% introductory APR offer, you’ll have multiple months to pay off the balance interest-free. Just make sure you’re able to pay off your purchase before the intro offer ends and a variable APR sets in.

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