Choosing the right structure for your business can have a major impact on taxes, liability, flexibility, and compliance. Here's a clear comparison between S Corporations (S Corps) and Partnerships, with guidance from IRS and government sources to keep everything accurate.
S Corporation (S Corp)
A corporation that elects pass-through taxation under Subchapter S of the Internal Revenue Code. Profits, losses, deductions, and credits are reported on shareholders' individual tax returns — avoiding corporate double taxation.
Partnership
A business structure where two or more people share ownership. It’s a "flow-through" entity: the partnership itself doesn’t pay taxes—partners do, based on their distributive share under Subchapter K.
S Corp
Avoids double taxation. Income passes directly to shareholders' returns.
Shareholders who work in the business must receive reasonable compensation (W-2 wages), which are subject to payroll taxes. Remaining profits may be distributed as dividends not subject to self-employment tax.
Partnership
Income passes through to partners’ personal returns via Schedule K‑1.
Partners are considered self-employed and pay self-employment tax on their entire distributive share—not just salary.
S Corp
Income and losses are allocated strictly based on share ownership — no flexibility.
Shareholders cannot include entity-level debt in their tax basis.
Partnership
Offers flexibility in allocating income, losses, and distributions, as long as allocations reflect economic reality.
Partners can increase basis using entity-level debt and capital contributions — beneficial for deductible losses.
Liability & Credibility
S Corp
Provides limited liability protection to all shareholders — their personal assets are generally safe from business liabilities.
Often seen as more credible by customers, vendors, and investors.
Partnership
General partners face unlimited personal liability. Limited partners have protection only if they don’t manage the business.
Less formal structure may signal less corporate legitimacy to external parties.
S Corp
Requires filing Articles of Incorporation, election via IRS Form 2553, and adherence to corporate formalities like annual meetings and minutes.
Stricter ownership rules: up to 100 shareholders, who must be U.S. individuals or certain eligible entities. Only one class of stock permitted.
Partnership
Quicker and simpler to form. Often, no formal state filing is needed—though a partnership agreement is highly recommended.
Ownership changes are more flexible and agile.
| Feature | S Corporation | Partnership |
| Tax Structure |
Pass-through; requires reasonable W‑2 wages |
Fully pass-through; all earnings subject to self-emp. tax |
| Flexibility |
Rigid allocations (based on shares) |
Flexible allocative structure |
| Liability |
Limited liability for all shareholders |
General partners exposed; limited partners protected |
| Formation |
Formal, higher compliance burden |
Informal, low setup burden |
| Ownership Rules |
Max. 100 shareholders; U.S. persons; one class of stock |
Few restrictions — high flexibility |
Choose an S Corp if you:.
Want liability protection and corporate credibility.
Are seeking payroll tax savings via distributions.
Can handle formalities like payroll, meetings, and limits on ownership.
Choose a Partnership if you:
Need flexibility in profit/loss distribution.
Want to use entity debt to enhance basis for losses.
Prefer a simpler structure with lower compliance.
Choosing between an S Corporation and a Partnership isn’t a one-size-fits-all decision. Each structure comes with unique rules, tax implications, and compliance requirements. While S Corps often provide stronger liability protection and potential payroll tax savings, Partnerships offer greater flexibility in how income and losses are allocated.
The right choice depends on your business goals, industry, ownership structure, and long-term strategy.
👉 Ready to determine which structure is best for your business? Our team at Certus can walk you through the details, highlight the benefits and drawbacks for your specific situation, and help you make the most informed decision possible.