What are the taxation difference between Partnership and S Corp

What are the taxation difference between Partnership and S Corp Partnerships and S corp businesses are both very popular models to use in starting a small business. They were both designed for small to medium-sized businesses, but they each have different tax benefits and liabilities for the owners. Let’s explore the differences. What Is The Difference Between The Two Entities Both business types are good for the small business owner, but before choosing which one to make your model from you must understand the differences between the two. A partnership is described using these points:

Usually has 2 or more different people who all co- own the business. They pool money that goes towards a common purpose. They share the up and downs of profit loss equally. While an S corp is defined by: The firm’s income goes through the stockholders (or shareholders) in proportion to the size of their investment. Can only have one type of stock and a set number of shareholders (usually 100 or fewer). Has a built- in limited liability protection for taxes Tax Forms Needed Both S Corps and Partnerships are “pass-through entities”, which means that there is no federal income tax at the corporate level but the income goes through several individuals. S Corporation's income goes through its shareholders, and Partnerships are taxed through the individual partner’s shares. Partnerships are taxed the same as any self-employed individual. You will need to have an EIN (Employee Identification Number) and to do that you first need an IRS EIN application, which requires you to fill out form SS-4. After that, Form 1065 is needed; this just calculates the profit or loss. S Corporations do not follow this method, instead, you will need to fill out Form 1120S, which is used for the annual tax return. Both Partnerships and S corps include Schedules K and K-1, which are used to show the different types of deductions and income among owners or partners. During tax season it’s important to keep organized and file the necessary paperwork. While filing for your business remember the different forms needed and give yourself an appropriate

amount of time to apply for any paperwork you don’t already have. For example, applying for your EIN by mail can take up to 4-5 weeks, so waiting until the last minute to do everything is not an option. Tax Benefits And Liabilities Of Each In the treatment of taxes, partnerships usually provide more flexibility. The way income flows through the different partners can offset income distribution and lower taxation. However, there is zero liability protection. If a partnership gets sued, their personal assets are on the hook. S Corp shareholders have limited liability protection, but the contributions made by shareholders are only tax-free if that group is controlling 80% of the corporation. So deciding between the two is largely a question of how much you’d have to pay for taxes and how much legal protection you need. If you are on the fence about which business entity is for you, it’s best to speak with a tax professional or a business lawyer. They may be able to point out things specific to your situation about which structure is best for you. Once your structure is set through your EIN, it can be quite the hassle to change it.