What's the difference: Corporations vrs Sole Proprietorships and Partnerships
Both sole proprietorships and partnerships have advantages to a start up business including lower start up costs and minimal formalities. Corporations also have many advantages such as self-employment tax savings, and are easier to raise funds for the business. Deciding what s best for you and your goals for your business, however we can help walk you through the steps. Check out these advantages to help you make an informed decision. Give us a call if you have any questions!
Advantages of a corporation versus a sole proprietorship or partnerships
Shareholders in a corporation are not liable for corporate debts
This is seen as the most important advantage of a corporation. In a sole proprietorship or a partnership, all owners are personally responsible for any and all debts. Creditors have the ability to go after each owner's personal bank account, house, or other assets to receive their funds if the debt is not settled
Under certain circumstances, an individual shareholder may be liable for corporate debts for multiple reasons including a shareholder personally guarantees a corporate debt, or a court may also determines that justice requires disregarding the corporate form. The court may do this in the following situations:
If personal funds are intermingled with corporate funds
If a corporation fails to have director and shareholder meetings
If the corporation has minimal capitalization or minimal insurance
If the corporation fails to pay state taxes or otherwise violates state law (like defrauding customers)
Corporations offer self-employment tax savings
Earnings from a sole proprietorship are subject to self-employment taxes. With a corporation, only salaries (and not profits) are subject to such taxes. This can save you thousands of dollars per year.
Corporations continue after death
Unlike a sole proprietorship or partnership, a corporation does not end on the death of its shareholders or owners.
Corporations make raising money easier
A corporation has many avenues to raise money. It can sell shares of stock and investors are more likely to provide capital knowing they are not personally liable for any corporate debts.
Transferring the ownership interests of a corporation is easier
A sole proprietorship or partnership cannot be sold as one entity. Instead, each of its assets, licenses and permits must be individually transferred. Where as corporations can be transferred to a third party as a whole.
Advantages of a sole proprietorship and partnership versus a corporation
Sole proprietorships and partnerships cost less to create
Corporations cost more to set up and run than a sole proprietorship or partnership. However, these costs are partially offset by lower insurance costs.
Sole proprietorships and partnerships have minimal formalities
A corporation can only be created by filing legal documents. The formalities include holding director and shareholder meetings, recording corporate minutes and having the board of directors approve major business transactions. If these formalities are not maintained, the shareholders risk losing their personal liability protection. While keeping corporate formalities is not difficult, it can be time-consuming.
On the other hand, a sole proprietorship or partnership can open and operate without any formal organizing or operating procedures - not even a handwritten agreement.
Sole proprietors and partners are not liable for unemployment insurance
A shareholder-employee of a corporation is required to pay unemployment insurance taxes on his or her salary, whereas a sole proprietor or partner is not.
If you have any further questions regarding whether you should incorporate or not, give us a call!