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.