If you and a partner are the only owners of your business, considering a corporate structure might make sense. Business structures offer varying personal liability, taxation, funding options, and management types. While most small businesses in North Carolina start out as sole proprietorships or partnerships, there are benefits to becoming a corporation. Let’s look at the benefits and drawbacks of a partnership vs corporation in North Carolina.
Partnership vs Corporation in North Carolina
Personal Liability
When you operate as a partnership, you and your partner are personally liable for any debts or lawsuits the company may face. If your partnership can’t pay debts, creditors can come after your personal assets as a business owner.
However, with other limited liability business structures, such as a corporation, you and your partner can shield yourselves from personal liability. This means that your liabilities are limited to the company’s money in its bank account.
While partners own their company together as individuals, corporations are a separate legal entity owned by shareholders. Shareholders decide who manages the company and handles the legal obligations.
Raising Capital As a Corporation vs Partnership
A C corporation vs partnership also differs in how the business raises capital. If you want to acquire funding from investors, then forming a corporation is often beneficial. It may even be essential if you use angel investors and venture capitalists. They will likely want stock in exchange for their financial backing.
Many entities will refuse to invest money into your business unless it’s incorporated. And another benefit of the corporate structure is that investing in stocks has the potential to generate remarkable returns, with rewards ranging from 20x-40x of your initial investment. (1)
Personal Liability: Protecting Your Personal Assets
Your business structure impacts how much money you keep in your pocket, how much paperwork you have to do, and how much personal liability you’re exposed to.
In North Carolina, there are many types of structures to choose from to limit your liability and put more money in your pocket. So let’s briefly look at the options.
Sole Proprietorship
In North Carolina, operating as a sole proprietorship means unlimited personal liability for debts and obligations that your business takes on. As the only owner, you’re liable for everything that happens with your business.
For example, let’s say you sign a contract with a vendor, but your business can’t pay. You would be personally responsible for the debt. If the business can’t pay, creditors could come after your personal assets. Unlimited liability means everything you own is available for any judgments against your business.
Business taxes for a sole proprietorship are relatively simple. You report all profits and losses on your individual tax returns.
General Partnership
General partners also have unlimited personal liability for the business’s actions. For example, let’s say you own a nail salon, and a client develops a terrible infection from a cuticle your employee accidentally cut with unsanitized equipment. If the client is in the hospital with sepsis, you and your partners are on the hook for all medical bills, damages, and legal fees.
Professional service businesses can face serious liability issues unless an umbrella or business insurance can make up the difference.
Limited Partnership (LP)
Limited partners in North Carolina can limit their personal liability to the partnership’s debt. This means that limited partners are not liable for debts or liabilities incurred by the partnership if they don’t participate in day-to-day operations.
For example, let’s say your partnership takes out a loan to purchase new equipment but then falls behind on payments due to cash flow issues. The partnership and the general partners will have to come up with enough money to pay off the loan and any other debts, but limited partners are only liable for the partnership’s debt up to their investment in the partnership.
Limited Liability Partnership (LLP)
Limited liability partnerships (LLP) in North Carolina combine the partnership structure with limited liability for all partners. This means that each partner is only liable for their own actions and not those of other partners unless they explicitly agree to be responsible.
For example, let’s say you are a partner in an LLP, and your partner decides to buy a new piece of equipment that ends up being defective. You wouldn’t be held liable for your partner’s decision, unless you explicitly agreed to be held responsible for the purchase.
So with an LLP, you are sometimes responsible for the business’s debts, depending on your partnership agreement. If you need help drawing up a partnership agreement that covers you in the case of your partners’ mistakes, talk with your business attorney.
Limited Liability Company (LLC)
An LLC in North Carolina is a partnership structure that combines the partnership structure with limited liability for all of the members. This means that each member is only liable for their own actions, not those of other LLC members, unless they explicitly agree to be held responsible.
Unlike an LLP, you are never responsible for debts or obligations incurred by the LLC as long as you are not a part of the management. Members also have limited liability for contracts or agreements that other members sign on behalf of the LLC.
S Corporation
S corporations pay income tax as a pass-through entity. Profits and losses flow directly to the owners on their personal tax returns.
S corp shareholders have limited liability for debts, obligations, and lawsuits of the corporation as long as they are not involved in managing or operating the company.
C Corporation
In North Carolina, a C corporation is an independent business entity that allows the limiting of personal liability for business debts or obligations. So, if the business fails, shareholders are not responsible for any debt or losses.
Unlike pass-through entities like partnerships and S Corps, a C corp faces double taxation. The C corp pays taxes on any business income generated by the company. Then shareholders also pay taxes on any dividends they receive from the company.
However, C corporations offer some tax advantages also. While double taxation may seem like a problem, many businesses can benefit from the tax advantages of C Corps – business owners can often pay lower taxes by taking advantage of credits and deductions available only to corporations. Plus, profits can be reinvested in the business to help it grow instead of being distributed to shareholders.
And corporate tax rates are often lower than your personal income tax rate, which can benefit high-income earners. However, you must fill out additional paperwork and pay filing fees to form a C corp.
Bottom Line
Overall, a partnership and a corporation both offer benefits and drawbacks depending on your business type and capacity for liability. Whether you should operate as partnership vs corporation depends on the type of business structure that best fits your needs.
Understanding the differences is essential before deciding which structure is right for you and your business. With the help of a knowledgeable business attorney, you can create an entity that allows you to minimize your risks and maximize your potential for success.
Our Experienced North Carolina Business Attorneys Can Help
At Hopler, Wilms, and Hanna, our business attorneys can help your business thrive in North Carolina. We understand the complexities of business structures in our state, whether partnership vs corporation or LLP vs LLC. Our experienced legal team can help you choose the right business entity for your company, whether your concerns include startup costs, corporate taxes, state legal requirements, or self-employment taxes.
We look forward to helping your business succeed! Contact us today to let us guide your business into a bright future.