Starting a Michigan Business Series: Corporation or Partnership?
As an entrepreneur you end up wearing quite a few hats. This doesn’t always leave time for finding relevant information for your business. Were do you even begin when it comes to starting your small business? The Starting a Michigan Business Series will be designed to answer FAQ’s related to launching a business in Michigan.
First up in our series is Corporation or Partnership? Is there an advantage to one over the other?
Quite simply, it depends. Not quite what you were looking for. Yet it really is determined by your situation. Each has an upside and downside.
Let’s take a look at the differences.
Corporation Advantages:
- Shareholders (company owners) have personal limited liability
- Access to capital is easier than with other structures
- Profits can be divided between owners and the corporation which reduces taxes and offers lower tax rates
- Perpetual existence. Upon death of an owner (stockholder) the corporation continues to exist
- Tax benefits for employee fringe benefits such as medical, dental, and disability
Corporation Disadvantages:
- Fees. It costs money to incorporate, plus recurring annual corporate fees
- There are formalities that MUST be followed. There is no flexibility here
- Profits paid to owners are subject to double taxation
- Can be complex to set up and maintain
- Dissolution does not automatically happen
Partnership Advantages:
- Pooling of resources, expertise and strengths
- Fewer formalities than other business structures
- Does not pay Federal income taxes
- Liability is spread among the partners
- Investment can come from partners as a quick easy loan. This creates interest income for the partners and a business deduction
Partnership Disadvantages
- All partners are personally liable for business debts and liabilities
- There may be unequal commitment (think time and finances, click here)
- Can be difficult to attract investors
- Partners may have differing opinions on how to run the business
If you’re a current small business owner, what has your experience been with these business structures? What would you recommend to an entrepreneur just getting started?