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What is the advantage of incorporating over a partnership?
Q: What is the advantage of incorporating over a partnership?
A: I hate to say this, but, 'it depends.' Each form has its advantages and disadvantages and which is best is determined by your specific situation. Here is a listing of some advantages and disadvantages of each. As always, before you make a decision, check with your attorney and/or CPA.
It should also be noted that there are various types of partnerships and corporations.
Partnership Advantages:
- Synergy as a result of pooling partners' different areas of expertise.
- The partnership does not pay Federal in-come taxes. An informational tax return (IRS Form 1065) must be filed which shows the pass-through of income/loss to each partner.
- Liability may be spread among the partners.
- Investment can come from the partners in the form of a loan which creates interest income for the partners and a business deduction for the partnership.
Partnership Disadvantages:
- Formation and subsequent changes in structure are complex.
- Problems with partner(s) as the result of misunderstandings, different goals, etc., can weaken or destroy the partnership.
- Limited partners are liable for debt if they are active managers in the business. General partners have unlimited liability. You may also be liable for the commitments of your partners.
Regular Corporation Advantages:
- Shareholders (the owners) enjoy personal limited liability.
- It is generally easier to obtain business capital than with other legal structures.
- Profits may be divided among owners and the corporation in order to reduce taxes by taking advantage of lower tax rates.
- The corporation does not dissolve upon the death of a stockholder (owner) or if owner-ship changes.
- Favorable tax treatment for employee fringe benefits including medical, disability, and life insurance plans.
- 70% of any dividends received by the corporation from stock investments are deductible (unless you purchased the stock with borrowed money).
Regular Corporation Disadvantages:
- More expensive and complex to set up than other legal structures.
- Completing tax returns usually requires the help of an accountant.
- Double taxation on profits paid to owners (corporation pays corporate taxes on profits and owner pays personal taxes on dividends from the corporation). Recurring annual corporate fees.
- Tax rates are higher than individual rates for profits greater than approximately $75,000.
- 28% accumulated earnings tax on profits in excess of $250,000.
- Business losses are not deductible by the corporation.
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