Matt and Christopher, friends since college, came up with a great idea for a business. As they work on their business plan, they have to decide what kind of business entity works for them. They narrowed it down to corporation vs. partnership. Let’s look at which structure might be best for them.
A corporation is a legal entity that uses a board of directors to manage its business. Virginia has two types of corporation:
- Stock corporations may issue shares to shareholders and are “for-profit” organizations.
- Nonstock corporations have members, but not owners, and are organized for non-profit purposes.
Partnerships consist of two or more people who own a for-profit business.
In a nutshell, corporations are taxed on all profits, less business expenses. The shareholders of a corporation pay tax on money that is distributed to them.
Partnerships are pass-through entities. The partnership is not taxes on its income. Instead, each of the partners pay income tax on the income they receive from the partnership.
Start Up Costs and Paperwork
Corporations generally are more difficult and more expensive to form compared to partnerships. For example, corporations must file formation and registration documents with the Virginia State Corporation Commission. Partnerships, on the other hand, do not have to file with the State Corporation Commission.
Partnerships may be easier, but there are still fees to pay and paperwork to complete.
This is where corporations may have a real edge over partnerships.
Officers, directors, shareholders, and members of a corporation generally are not liable for any obligations of the corporation. The same is not true for partners.
Unless a partnership is registered as a limited liability partnership, the partners are each liable for the obligations of the partnership
Important Lessons Learned
Matt and Christopher struggled a little with their decision. After weighing the advantages and disadvantages of each business structure – corporation vs. partnership – they opted to form a partnership. At some point in the future, they may convert to a corporation.
At Dillon Law Group, PLC, your business concerns become our business concerns. Our attorneys work with you to make thoughtful decisions about your future. Give us a call at 757-962-4796 or use our convenient Contact Form. We assist clients in the Virginia Beach and Newport News areas.