Partnerships and corporations are types of ownership among businesses. These entities have various similarities and differences. On some occasion’s corporations may have advantages compared to partnerships, while in other cases, partnerships may be favored. Partnerships are generally businesses that are owned jointly by a given number of people and whose objective is to earn profits (Skripak, 2016). Partnerships are mainly formed to overcome the drawbacks and limitations that sole proprietorship. A partnership is designed in such a way that the agreement balances the risks in the business.
In a partnership, the partners provide the capital required running the business and they also have an agreement deed referred to as a partnership deed (Kaya & Vereshchagina, 2014). The partnership deed is the agreement that lays the terms and guidelines in the partnership concerning sharing profits and losses and any other issue in the partnership (Skripak, 2016). The partnership agreement will contain the following details: capital to be contributed by each partner, the terms and conditions to be followed when dissolving the partnership, and the resolution of any problem that may arise in the course of the partnership.
The types of a partnership include limited liability partnership, limited partnership, joint venture, and limited liability. In general partnerships, there is equality in agreements, and the partners can be delegated various roles in the roles according to their partnership agreement. In a limited partnership, partners are restricted to personal liability depending on the investment made on the business (Skripak, 2016). In this kind of partnership, one of the partners (the limited partner) is responsible for fewer risks, which in turn, the partner is involved in fewer business decisions. On the other hand, in limited liability partnerships, there are tax benefits and more liability protection.
A corporation differs from a partnership because corporations are legal entities that are separate from their owners. This means that corporation is responsible for assuming all debts and any legal obligation without affecting its shareholders. The main features of corporations concerning accounting are the corporation’s life cycle. This means that corporations can extend even after the owners and can only be dissolved when the board of directors and shareholders mutually agree to dissolve the corporation (Skripak, 2016). The second feature of corporations is that the shareholders own professionals mainly manage it and their limited liabilities since taxation is a significant aspect of corporations (Skripak, 2016). The primary examples of corporations in the United States are General Motors, FedEx, and Anheuser Busch.
The costs of starting corporations are much higher compared to establishing partnerships and the formation of a corporation requires additional funding and the procedure to be followed is more complex (Kaya & Vereshchagina, 2014). Corporations also need various tax and legal requirements, but partnerships have a lower cost of formation and have less tax and legal requirements.
Within corporations, the limited liability is beneficial to the shareholders because they are not liable for any obligations that need to be met by the corporation (Remund & McKeever, 2018). Limited liability, in this case, means that the corporation shareholders are not liable for the debts that the corporations incur (Skripak, 2016). Also, the shareholders will not face any risk of losing additional funds above their actual investment. The primary reason for the limited liability in corporations is that corporations are distinct and separate legal entities from the owners (Remund & McKeever, 2018). The advantage of limited liability is that it allows business entities to grow and become more productive due to their ability to source investment shares and other productive resources. These resources are significant in molding corporation growth.
Unlike corporations with limited liability, partnerships have an unlimited obligation or bond, which they are required to use their resources to pay up debts and settle other partnership liabilities (Remund & McKeever, 2018). The reason for this is unlike a corporation, a partnership is not a separate legal entity from its owners. Therefore, the owners, in this case, the partners have to meet the liabilities of the partnership.
Within a corporation, the shareholders are the owners, and shareholders invest in the corporations through buying shares. The shareholders' vote in a board of directors who are responsible for the operations of the corporation (Skripak, 2016). The boards of directors are then responsible for making significant decisions on behalf of the shareholders (the owners of the company). The ownership in corporations may vary depending on whether the corporation is publicly held such as Apple, or it is a closely held corporation like Chrysler (Kaya & Vereshchagina, 2014). By contrast, ownership and control in partnerships are equally shared.
Corporations have a significant fortunate due to their continuity. Continuity, in this case, refers to the aspect that the business entity continues even after the duration of it’s current and previous owners. As mentioned before, corporations are separate legal entities from their owners. A partnership will lack continuity because they are not separate legal entities from their owners (Skripak, 2016).
The transferability of interests in corporations is much easier compared to partnerships because it involves the sale of stock (Remund & McKeever, 2018). However, small corporations may experience difficulties, especially when there are contractual transfer issues, or there is no market for the sale of stock. In partnerships, transferability is not as easy because the current partners have to agree to bring another partner in. All the partners have to concur with the transferee.
A corporation will have a higher capacity to raise capital by selling shares. The selling of share stock simplifies the corporations’ need to raise the capital required to fund the company operations. The financial strength that arises due to shareholders' capital gives corporations a competitive advantage compared to other ownership forms. Partnerships, on the other hand, may use their profits to woe investors to invest in their partnerships. Partnerships have more flexibility when it comes to financing partnerships (Law corporate & Finance), and just like corporations; they may rely on bank loans to fund their operations. However, partnerships may receive lower value bank loans compared to corporations due to their amount of collateral.
Within partnerships, the partners are taxed individually based upon income tax. And within corporations, there is double taxation. The corporation is taxed at a specific corporate tax rate, where the shareholders are taxed when the corporation pays dividends to the shareholders. However, small corporations are not double taxed and are instead treated as partnerships.
In conclusion, partnerships and corporations are among the significant types of business ownerships. Both have advantages and disadvantages, and their suitability varies depending on various factors. They also have differences, with the major one being in the context of liability. Partnerships have an unlimited obligation, while corporations have limited liability.
- Kaya, A., & Vereshchagina, G. (2014). Partnerships versus corporations: moral hazard, sorting, and ownership structure. The American Economic Review, 104(1), 291–307. Retrieved from: http://web.a.ebscohost.com.nuls.idm.oclc.org/ehost/pdfviewer/pdfviewer?vid=4&sid=2ab3c028-35ca-464c-9883-8deddc28da93%40sessionmgr4007
- Remund, D. L., & McKeever, B. W. (2018). Forging effective corporate/nonprofit partnerships for CSR programs. Journal of Communication Management, 22(3), 309–326. Retrieved from: https://www-emerald-com.nuls.idm.oclc.org/insight/content/doi/10.1108/JCOM-08-2017-0084/full/pdf?title=forging-effective-corporatenonprofit-partnerships-for-csr-programs
- Skripak, S. J. (2016). Fundamentals of business. Virginia Tech. Retrieved from: https://vtechworks.lib.vt.edu/bitstream/handle/10919/70961/Fundamentals%20of%20Business%20(complete).pdf?sequence=4&isAllowed=y
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