Corporations and partnerships are distinctly different forms of ownership of a
business and are usually formed in the early stages of the business. These
business entities are formed for a variety of reasons such as limiting the legal
liability of the individuals, establishing the division of ownership, and
establishing the rights and liabilities of the owners.
A corporation can generally be described as an organization that is
created and owned by individuals for the purpose of conducting a business. It is
a legal entity that is separate and distinct from its creators and owners. A
corporation can own property in its own name, have employees, sue and be sued,
and enter into agreements.
To form a corporation, the organizers file "Articles of
Incorporation" with the appropriate state office. The Articles, sometimes known
as the corporate charter, contain information related to the general structure
of that particular corporation. This information includes the name, address,
and purpose of the corporation, the number of shares (ownership interests)
authorized to be issued, and the name and address of a resident agent (a person
designated to receive official papers and notices for the corporation).
are distinct types of corporations available under various state laws, including
non-profit corporations and professional corporations which serve specialized
types of organizations.
The usual type of corporation is a general corporation with indefinite
existence. Upon the formation of the corporation, the shareholders may elect to
have the losses or profits of the corporation flow through to their own
personal taxes. This is referred to as an "S Corporation."
corporation is owned by its shareholders. Shares of stock represent ownership in
the corporation. Stock certificates are issued by the corporation based on the
amount paid to the corporation. Shares of stock can be sold by its owner,
however, some restrictions in stock transfers can be included in the Articles of
Incorporation or By-Laws. Generally, stockholders have the right to inspect the
books and records of the corporation.
Shareholders elect a Board of Directors, which is responsible for the corporate
operations. The Board of Directors adopts By-Laws, which include details about
administering the corporation, such as the method of selecting officers and
issuing stock, as well as procedures required for stockholder and Board of
Directors meetings. The Board of Directors appoints officers, such as President,
Vice-President, Treasurer, and Secretary, who normally make the day-to-day
decisions of the corporate business.
There is usually no prohibition against shareholders,
directors, or officers being personally employed by the corporation or entering
into contracts with the corporation, though restrictions on these matters can
be established by the corporation.
circumstances, neither the stockholders, directors, officers, nor other
individuals are personally responsible for the debts and liabilities of the
corporation. This limited liability is often the principal reason for forming a
corporation to conduct the business. There are circumstances, however, when
individuals can be held responsible for corporate debts. The most common
situation is one where the corporation is not conducting its business as an
entity separate from its owners.
also may be individual liability under the Internal Revenue Code in situations
where certain tax obligations of the corporation are not paid.
partnership is formed when two or more persons enter into an agreement to carry
on a business for profit. The distinct difference between a partnership and a
corporation is that unlike shareholders, who are usually not liable for
corporate debts, each partner is individually responsible and liable for the
debts of the partnership.
An essential characteristic of a partnership is that profits are shared
by the partners. Often, the agreement provides that losses are shared, though
this is not essential. The duration of the partnership is usually specified in
The partnership can adopt any name it chooses. Like a corporation, it is
a distinct and separate legal entity and can acquire and own property, as well
as conduct business in its own name.
have a duty to act in good faith in all their transactions affecting the
partnership and each other. Partners are presumed to have an equal interest in
partnership property and the right to control partnership business, but can
distinct type of partnership, known as a "limited partnership," is a partnership
having "general" partners and "limited" partners. The essential characteristic
of this type of organization is that limited partners, unlike general partners,
are not personally responsible for the debts of the partnership and do not
participate in the control of the partnership business. Typically, limited
partners are financial investors in the partnership who participate in profits
but are not liable for general partnership obligations.