An S Corporation and a partnership are both types of business structures that offer pass-through taxation, which means that the business itself is not taxed on its profits, but instead the profits are passed through to the owners and taxed on their individual tax returns. However, there are some important differences between these two structures:
- Ownership: Partnerships are owned by two or more individuals or entities, while S Corporations can have up to 100 shareholders who must all be individuals, estates, or certain types of trusts.
- Liability: In a partnership, all partners are personally liable for the debts and obligations of the business. In an S Corporation, shareholders are generally not personally liable for the debts of the corporation, except in certain limited circumstances.
- Management: Partnerships are typically managed by the partners, who all have equal rights to manage the business unless otherwise specified in the partnership agreement. In an S Corporation, management is handled by a board of directors, which is elected by the shareholders.
- Self-Employment Taxes: In a partnership, all partners are subject to self-employment taxes on their share of the business's profits. In an S Corporation, only the wages and salaries paid to the shareholder-employees are subject to self-employment taxes.
- Fringe Benefits: S Corporations can provide certain tax-free fringe benefits to their shareholder-employees, such as health insurance premiums and contributions to retirement plans. Partnerships cannot provide these benefits to partners.