The significant difference between S corps and partnership is the protection limited liability that S corps business owners enjoy. Partnerships, however, do not have this protection, although some owners of general partnerships can claim this.
With a S corp arrangement, business growth becomes easy since it is easy to issue stock to new shareholders, which is not easy to achieve in partnership. However, the bright side is that partnership benefits from lenient taxation requirements alongside conducive requirements for registration and maintenance.
S Corps and Partnerships
The aim for designing S corp and partnership business was for small and medium businesses to grow. There is no corporate tax payment with both businesses. Hence, the owners need not worry about the double taxation that affects C corporations. The structures, liability treatment, and taxation of both businesses, however, are not the same.
States create the enabling laws for partnerships. With this, the state (a state where they are formed) regulates the partnerships. On the other hand, the federal government created the S corp arrangement, which is different from an entity but a form of tax treatment available to some firms.
Here are the significant difference between an S corp and a partnership:
Ownership
Laws guiding the owners
Only citizens and residents of American can be the owner of an S corp. This limitation does not bind a partnership. An S corp is limited to one stock type, which means there are the same criteria for distribution of income and losses across all owners.
The presence of a class of stock can be an impediment when it is time for such a business to look for more capital. Distribution of losses and profits for partnerships, however, comes with some flexibility.
Owner’s Contribution
Contributions of appreciated ownerships of partners to their business are not taxed for partners. For S Corp shareholders, such contributions to the firm might be subject to taxes in some cases.
Tax treatment
Borrowed Starting Capital
For S-corps, borrowed funds cannot be included as the basis for ownership. On the other hand, partners can have funds they borrowed as their basis. This is important because small business owners are allowed to deduct business losses on their tax returns. The limitation of these deductions is a factor of the basis of each owner. As a result, businesses that borrow funds and incur losses will better remain as a partnership since there will be tax savings for the owners.
Type of taxes
Personal income taxes are compulsory for owners of both business types. Also, active partners must pay self-employment taxes which are not the same as S corps owners. Employee shareholders will not pay self-employment taxes. Rather, they have to earn their salary from the business and pay their FICA taxes.
Maintenance and Formation
Formation
There is no special paperwork required to file a partnership. However, for S-corp treatment, the business must first register as a limited liability company or an S corp. Also, such a business must meet all guidelines specified by IRS.
Requirement for Maintenance
Annual reports (or biennial) must be submitted with the states for business classified as a corporation. Such requirements do not bind a partnership.
Structure
The structural requirement for a partnership is limited. All partners have equal power and say no matter the share of each partner in the business. In fact, there can be a loss and profit allocation method decided by the partner, which is not a factor of the shares of each owner.
S corps, registered as corporations, need to have a former management structure composed of officers and boards of directors. The number of shares of each holder is the only basis for allocating profit and loss in an S corp.
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