Corporations Vs. Sole Proprietorships and Partnerships
There are many advantages and disadvantages to consider when comparing corporations to sole proprietorships or partnerships since these legal entities have different structures and requirements.
Corporations, Sole Proprietorships, and Partnerships: Definition
Acquiring a basic understanding of each structure is crucial to becoming able to differentiate between the three types.
- Corporation: A corporation is an independent legal entity managed by a single owner or a group of shareholders. This structure is mostly adopted by large businesses.
- Sole Proprietorship: A sole proprietorship is usually managed by a single person, who is held liable for the business’ financial situation. Therefore, it is not considered an entity from a legal perspective.
- Partnership: A partnership refers to two or more persons equally sharing the losses and profits in a business. Partnerships can be classified under many types, to each its legal conditions.
The Advantages of Corporations Compared To Sole Proprietorships and Partnerships
Among the main advantages that make the corporation structure stand out compared to partnerships and sole proprietorships is the fact that this legal entity guarantees complete independence of the owner or shareholders’ personal assets.
Unlike sole proprietorships and partnerships where owners are responsible for the company’s debts, corporations offer their owners full protection of their personal bank accounts and properties. Therefore, their personal assets are never used to compensate for the company’s funds.
However, there are cases where a shareholder might be responsible for the corporation’s debts. The legal term that refers to this situation is called “piercing the corporate veil”. This can potentially occur under one of the following circumstances:
- The funds or debts of shareholders are intermingled with the corporation’s.
- The corporation violates states law, by failing to pay state taxes for instance.
- The corporation does not hold meetings for shareholders with the director.
- The corporation fails to have good capitalization or insurance.
Other than that, a corporation can be the best legal entity to save thousands of dollars yearly, as it only imposes taxes on the salaries rather than the profits, while the self-employment taxes in sole proprietorships are determined by the overall earnings of the business, profits included.
Additionally, a corporation is known to have a prolonged life versus partnerships and sole proprietorships. This is thanks to its continuous activity despite the death of a director or a shareholder.
Not only that, corporations provide multiple ways to increase the capital that investors prefer since they won’t be personally liable for the corporation’s debt. These strategies can include selling stock shares or even creating new ones, depending on the corporation’s needs and requirements.
Furthermore, the corporate structure allows the ownership interests to be sold without generating the slightest effect on the business activity, whereas sole proprietorships or partnerships require new tax identification numbers and bank accounts to transfer the assets, permits, and licenses separately.
The Advantages of Sole Proprietorships and Partnerships Compared To Corporations
Despite the list of advantages a corporation offers its owner and shareholders, there are, however, some disadvantages to it compared to sole proprietorships and partnerships.
One of the advantages that characterize sole proprietorships and partnerships is the reduced legal fees and insurance costs. Nevertheless, these costs can be lowered for corporations too by choosing the right partner to help you incorporate your business swiftly.
Besides that, the minimized formalities in sole proprietorships and partnerships can be a distinguishing feature. This means that sole proprietors or partners can easily skip director and shareholders meetings, as well as keeping corporate minutes, thus saving more time in comparison with corporations.
Finally, corporations necessitate an unemployment tax on the salary to be paid by the shareholders or employees, while a sole proprietorship or partnership does not.