Partnership or Corporation?
My friend and I plan to start a business selling products online. We are looking into options to create a formal business entity but are not sure whether partnership or corporation is the way to go. Any ideas?
You are smart to give serious consideration to the structure of your new business early in the process of getting it off the ground. This is not, however, a “one size fits all” problem. Every new venture has special and unique circumstances which will dictate the best way to structure the new business.
Partnerships and corporations each offer their own specific benefits and drawbacks. For example, general partnerships are often preferred because they are easy to form. While a written partnership agreement is generally preferable, in some cases a verbal agreement or even just acting as though you both are in a partnership may be enough to establish that a partnership exists under Texas law. The partnership itself is not taxed; instead, the general partners typically report the business profits or losses on their personal tax returns. One huge drawback to a partnership is that the general partners are personally liable for the debts and obligations of the partnership. Simply put, you can be sued and found personally liable in your role as a general partner.
Alternatively, a major benefit to a corporation is the liability protection it can provide. Like other states, Texas recognizes a corporation as a separate legal entity liable for its own debts and obligations. In some cases, the personal liability protection is outweighed by the difficulty in forming a corporation, which requires compliance with various Texas corporate statutes. The structure of a corporation – usually including officers, directors, and shareholders – can be complex. Also, unlike general partnerships, corporations are typically taxed directly, which can create a lengthy list of tax issues that may or may not be favorable.
Check out the Texas secretary of state’s website (www.sos.state.tx.us) for other business structure options, and read next week’s “Common Law” to learn about limited liability companies, which combine the best features of partnerships and corporations. Be sure to talk to a lawyer and accountant to learn what specific option is best for your new business!
This article appears in January 16 • 2009.