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You’re about to start your business in Los Angeles. You’ve got a solid business plan, a dedicated team, and a clear vision. But one critical decision remains: how should you legally structure your business? Choosing between a partnership and a corporation is not just a formality; it’s a decision that will shape the viability and success of your business.

At Artemis Law Group, we help you select the right legal structure for your business and set it up for success. The right entity will depend on factors like liability, taxation, ownership structure, and operational requirements. In this article, we explore the differences between partnerships and corporations in Los Angeles to help you make an informed decision.

Formation and Complexity

Partnerships

Forming a partnership is relatively inexpensive. Typically, you only need to secure a business license and, in some cases, file a “doing business as” (DBA) name with the county. While not legally required, drafting a partnership agreement is recommended. This outlines each partner’s responsibilities, ownership percentages, and profit-sharing arrangements.

Corporations

Establishing a corporation is a more complex and costly process. You’ll need to file Articles of Incorporation with the California Secretary of State, adopt corporate bylaws, issue stock certificates, and hold an initial board of directors meeting. If you choose to operate as an S-corporation, you must also file IRS Form 2553 to gain pass-through tax benefits. Regular maintenance, including annual filings and formal record-keeping, is also essential.

Ownership and Control

Partnerships

In a partnership, ownership is shared, with general partners taking on decision-making responsibilities. Each partner’s role and share of the business should be clearly defined in the partnership agreement. Limited partnerships (LPs) and limited liability partnerships (LLPs) allow for some variation, such as limiting certain partners’ involvement in day-to-day operations.

Corporations

Corporations are owned by shareholders who hold stock in the company. Shareholders elect a board of directors, which is responsible for overseeing the business’s direction and appointing officers (e.g., CEO, CFO) to manage operations. This separation of ownership and control offers a clear hierarchy but also requires adherence to formal governance processes.

Liability Protection

Partnerships

General partnerships offer no personal liability protection. General partners are personally responsible for the business’s debts and legal obligations, putting their personal assets at risk. Limited partnerships and LLPs, depending on their structure, provide some liability protection for limited partners and certain general partners.

Corporations

Corporations establish a separate legal entity to provide robust liability protection. In this structure, shareholders’ personal assets are generally shielded from business liabilities, meaning creditors can only pursue corporate assets to settle debts. However, personal guarantees on loans or instances of fraud can pierce this corporate veil.

Taxation

Partnerships

The IRS treats partnerships as pass-through entities, which means the business itself doesn’t pay corporate taxes. Instead, profits and losses are reported on each partner’s individual tax return, and taxes are paid at the personal income tax rate. This can simplify tax filings but also expose partners to higher tax burdens in certain cases.

Corporations

Corporations face different tax treatments depending on their structure. For example, C-corporations are subject to double taxation, where the business pays corporate taxes on profits, and shareholders pay taxes on dividends. On the other hand, S-corporations avoid double taxation by allowing profits and losses to pass through to shareholders’ personal tax returns. However, S-corporations are limited to 100 shareholders and one class of stock.

Flexibility and Adaptability

Partnerships

Partnerships offer significant flexibility in terms of management and operations. Partners can decide how to allocate responsibilities, profits, and losses, making partnerships a good option for businesses that require collaborative decision-making. However, this flexibility can also lead to disputes if roles and expectations aren’t clearly defined.

Corporations

Corporations are less flexible due to their formal structure and regulatory requirements. However, they are better suited for scalability and attracting investors. Corporations can issue stock to raise capital and accommodate a growing number of stakeholders, making them ideal for businesses with long-term expansion goals.

Requirements and Maintenance

Partnerships

Most partnerships in Los Angeles only require annual state filings and payment of applicable taxes or fees. General partnerships, in particular, have minimal ongoing requirements, though maintaining proper records and agreements is essential for smooth operations.

Corporations

Corporations require significantly more maintenance. This includes holding regular board and shareholder meetings, maintaining detailed meeting minutes, and filing annual reports with the state. Failure to meet these requirements can result in penalties or loss of corporate status.

Financing Opportunities

Partnerships

Partnerships can raise funds by bringing in new partners or securing loans, but their options are somewhat limited compared to corporations. Investors often prefer equity in the form of stock, which partnerships cannot issue. Limited partnerships can attract investors as limited partners, but these investors typically have no role in management.

Corporations

Corporations excel at raising capital. They can issue stock to attract venture capitalists or angel investors or even go public through an initial public offering (IPO). This makes corporations preferred for businesses planning significant growth or seeking large-scale investment.

Is It Better to Have a Partnership or Corporation?

Deciding between a partnership and a corporation depends on your business’s goals, structure, and long-term vision. A partnership may be ideal if you’re collaborating with a small group of people and prefer a simple, cost-effective setup with flexible management. However, be prepared to shoulder personal liability and handle potential conflicts among partners.

A corporation may be better if you want to protect yourself from liability, raise substantial capital, or anticipate expanding your business. While corporations involve more upfront costs and ongoing maintenance, they provide the legal framework and tax advantages many growing businesses require, especially as they expand.

At Artemis Law Group, we help you evaluate your options and choose the best structure for your business in Los Angeles. Whether you’re leaning toward a partnership or a corporation, our experienced attorneys can guide you through the formation process, ensure compliance, and protect your interests every step of the way. Contact us today!

Contact Us 872-278-3647