Question

Picture if you will two sisters that want to start a business together. Sister “A” brings to the table technical knowledge and contacts with potential customers. Sister “B” brings to the table the physical facilities to make the product and the cash required to get their business of the ground. Based solely on this information, would you recommend the sisters start a general partnership or a traditional C-Corp together, and why? Minimum of 300 words

Answer 1

Solution: Lets take a look at the unique features offered by a C corporation vis a vis partnership and interpret how it impacts sisters A and B.

A C corporation, also known as a regular corporation, is the most recognizable type of business. A partnership is a business that is not incorporated and involves two or more people. C corporations may have a single person as the company's owner, or an unlimited number of shareholders participating in the ownership of the business. The choice will have important implications for your legal exposure, management structure, and ultimately, your bottom line.

Liability (limited vs unlimited)

Owners of a C corporation have limited liability protection against business lawsuits, liabilities and other business debts. In other words, the personal assets of a C corporation owner can not be taken as compensation for the C corporation's business debts. On the other hand, partners in a partnership business have unlimited liability for business liabilities and other business debts. This means that if the business gets sued, a partner may lose their home, car and other personal assets to satisfy the partnership's obligation.

Structure

A partnership business is managed by the partners of the company. Each partner may be assigned roles and responsibilities which are established by the company's partnership agreement. Owners of a C corporation do not participate in the day-to-day activities of the company. Instead, C corporations are managed by the company's directors and officers. C corporations are required to select board members, elect company officers, hold at least one annual meeting and keep records of all business activities. Partnerships are not required to select directors, hold meetings, file annual reports or create financial statements.

Taxation

A partnership is known as a pass-through entity that allows a partner of the business to report her share of company losses and profits on her personal income tax return. A partnership business does not file a business tax return with the Internal Revenue Service. C corporations are taxed twice on the company's profits. C corporations are required to file business tax returns, and owners of a C corporation are required to report money received from the company on their individual or joint tax returns and pay taxes on salaries and dividends.

Interpretation

In the given scenario, sister "A" brings the technical know how and network of potential customers while sister "B" brings the infrastructure and finances required to get the business up and running.

In terms of liability, a C corporation favors the sisters since it has limited liability however with limited liability comes limited rewards whereas partnership has unlimited liability thereby generating unlimited rewards.

In terms of structure, each partner in a partnership may be assigned clear roles and responsibilities which are established by the company's partnership agreement which would suit the sisters since both of them have varied skills and resources and fit perfectly as a combination, rather than one person running the whole business like in a C-corp.

The taxation system of a partnership is much more favorable and simple to the sisters because it will allow them to report share of company losses and profits on their personal income tax return as opposed to C-corps which are taxed twice and have multiple types of taxes.

In view of above observations, i would recommend the sisters to start a general partnership.