Being an entrepreneur in today’s market is both a blessing and a huge responsibility. After all, meeting the demands of your customers who trust you is an honor yet an everyday challenge.
And while worthwhile, we agree it’s incredibly busy – which is why the team here at Full Suite did the brunt work for you. Read on as we break down the essentials you need to know about choosing between a partnership and a corporation.
Previously, we covered registration as an independent professional or a sole proprietorship. And even earlier than that, we broke down the basics of simply starting a business. Today’s article covers the differences between a partnership and a corporation, to help you decide which type of business to register so you can take yours to the next level.
The Main Differences Between a Partnership and a Corporation
For purposes of today’s discussion, we’ll be tackling the key differences between a partnership and a corporation among 3 fronts: definition, liability and income tax treatment.
- Definition – A legal form of business operation between two or more individuals who share management and profits.
- Liability – Partners/owners are personally liable for the entity’s obligations & debts
- Income Tax Treatment – The partnership is taxed according to the respective income of their partners. This income is subjected to the graduated income tax scale for individuals – a scale that shows the percentage of tax that will be applied to your income depending on your income level.
- Definition – A corporation maintains a separate and distinct existence from its stockholders, directors and officers; in other words, a corporation is viewed as a different person in the eyes of the law.
- Liability – Based on its definition, your personal assets as a shareholder/director/officer cannot be used to pay the debts of the corporation; however, once you do invest, the capital you pay becomes part of corporate assets and your risk is directly proportional to this amount.
- Income Tax Treatment – The income of the corporation is subject to the corporate tax rate and not the individual tax rate. You can view the Philippine Corporate Tax rate here.
3 Key Factors to Consider
So we’ve covered the basic differences between each business type. But how does this exactly incorporate into your decision making?
As you can see from the simple rundown, there are pros and cons to each type. Neither type is better than the other. It only depends on what you’re looking for. So for a start, you can consider these factors when making your decision:
1) Appetite for risk: a partnership’s taxes “flow” through the profits/losses of its partners (as opposed to its declared income as an entity) so this would mean being personally liable for those profits and losses should your business suffer. A corporation’s structure shields you from being personally liable beyond the extent of your investment.
2) Working style: whether it’s a limited partnership or a general one, the partners in a partnership have clearly defined roles and responsibilities in operating the business and only have themselves to answer to; as a corporation, you’ll have to answer to your shareholders, work with a board of directors, and manage your officers who are in charge of the day-to-day affairs.
3) Relationship with stakeholders: In relation to your working style, the structure of the business is also greatly determined by the working style of your fellow stakeholders. A few questions to help you make your decision:
- Do they want to take an equally active role as you do in operating the day-to-day business, or do they view it as more of a passive type of income stream with shares?
- Would you rather operate it yourself and have your partners invest without having a say in decision-making?
This is by no means a comprehensive list – but it will definitely help steer you in the right direction as you come up with the best type for your business.
While we don’t have all the answers, we hope these facts and questions have helped you in determining better which type of business to register and why. Since these entities are unique in their own way, their required documents and registration processes differ per type. Learn more about how to register a corporation here.