A business can take many forms. Many small business owners operate under what is known as a sole trader. A sole trader involves just one owner and the owner has unlimited liability. Other businesses such as a law firm operate as a partnership while many corporations (such as those you see on the stock exchange and almost all household name companies) operate as a limited company. Below is a quick explanation of the differences between a company and a partnership.
Company:
Separate Legal Entity: A company is defined as a separate legal entity. This means it is separate from its owners and has its own legal rights. For this reason a person suing a company would not sue the owner but the company itself. This distinction is very important as it provides a number of advantages. Most notably it has unlimited life and limited liability.
Unlimited Life: The Company is expected to operate forever. In other words a company does not end when someone sells their stake in the business or the business owner’s pass away.
Limited Liability: Means that the owners are liable for what they initially invested in the company. This means in the event of bankruptcy owners will only lose what they put in. In other words they do not need to give up their own personal assets to pay debt holders.
Partnership:
A partnership involves two or more people forming a business. In a partnership a contract is formed between two or more persons who agree to pool talent and money and share profits or losses. It does not involve creating and applying for a company.
Partnerships are not distinct or separate from their owners:
- This means the life of a partnership is definite. If an owner dies or sells its holdings in the firm, the partnership ceases. The remaining owner must buy up the other shares and create a new partnership.
- What’s more if the firm falls into bankruptcy, any additional debt owed must be paid with the owners personal assets (his/her family home etc). For example if we have two partners – where one partner has a 10% ownership in the firm, and the other a 90% ownership. In the event of a bankruptcy, if the 90% owner fleas the country or has no personal assets himself, the burden completely falls on the 10% owner.
Why create a partnership?
1. Creating a company is expensive. There are costs in applying and forming a company and there are many ongoing costs such as preparing financial statements.
2. A company must comply with many accounting and legal regulations.
3. A company is taxed at the company tax rate while partners tax their profit at the personal tax rate.
