How Does Partnership Accounting Differ From Corporate Accounting?

There are two types of accounting: partnership accounting and corporate accounting. Each of these types of accounting is used by different types of business entities and processes the entity’s financial transactions, taxes, and overall financial reports in specific patterns. While there are many points to address, both similarities and differences can be identified. The objective of this article is to explain and give clarity on the distinctions between the two, to enable the reader to build some degree of understanding on how each type of accounting functions.

Nature of Business Entities

The first aspect which differentiates partnership and corporate accounting is the kind of business houses for which it is practiced. The partnership is a commercial legal structure where the business union is conducted by at least two people with investment and other assets for the operation of the business. They divide all the revenue and expenses of the business on the basis of the partnership agreement. On the other hand, a corporation is an independent legal entity in which people, the shareholders, own a portion of the business by purchasing shares in the business. The corporation’s corporate income is taxed, and the recipients of dividends are taxed on the income they derived from the shares.

Ownership and Control

Second, the ownership and control differences distinguish between the two types of accounting. In a partnership, the business is split between partners and those who invest in business have the same voting rights as others do. This means all decisions and actions taken within the partnership have to be unanimous. However, in a corporation, ownership of the business is divided among shareholders, and managerial control rests with the board of directors. It helps them enable companies to make better decisions and execute business processes.

Profit Distribution

With regard to profits, there are differences between partnership accounting and corporate accounting. In a partnership, profits earned out of the business by the partnership shall devolve upon them in proportion to the share of each such partner in the total share of the company. The amount of capital they have put into business, or the percent of their profits, is generally how they do this. However, in a corporation, earnings are distributed among its shareholders as dividends. Depending on the number of shares that the individual shareholders in the company own, the dividend is paid.

Taxation

There is one last main difference worth mentioning – taxation. In a partnership, it is the individuals—not the business—who are taxed. So the revenues and expenditures are borne by the members, who in turn declare his or her portion of the income or expenditure as appropriate on tax returns. This is known as pass-through taxation, and it allows an entity to be taxed at the rates that go with the owner’s individual income. In corporate taxation, a business organization taxes its income, and the shareholders tax their share of the profits in the form of dividends. This is referred to as cost double taxation.

Liability

With regard to such liability or responsibilities, there is a difference between partnership accounting and corporate accounting as well. The liability for the business debts and obligations is equal to the liability of the partners in a partnership. That is where the partners could be placed in a position where, if they cannot pay, and the business does not have money to pay its debts, then they are personally liable for paying debts from their own property. In a corporation, the shareholder’s risks are limited to their investment in the business or corporations. That means that while they share specific risk, they also ensure that their individual property is often insulated from the risk they encounter inside the corporation.

Lifespan

The other difference between the two types of accounting is the lifespan of the business entity in that operating accounting is usually applied to business firms with relatively long lifespan. A partnership can come to an end if a partner or representative is expelled from the business, dies, or becomes insolvent. This may cause some inconveniences to the business, and it can have legal implications on the business. In contrast, a corporation is a legal business entity that is formed and performs its business activities on a comparatively more permanent basis. Instead, it can survive if the shareholders are replaced or if the business is in some sort of financial trouble.

Flexibility

In this respect, partnership accounting is usually more flexible to changing business conditions. It’s adaptable for partners to alter the business strategy or make a decision that is satisfactory to all. In a corporation, the majority of the business direction changes or decisions entail the approval of the board of directors, and in most cases the shareholders. This can also decrease organizational flexibility.

Therefore, the main areas of distinction of partnership accounting and corporate accounting include the kind of business entities, ownership control, profit sharing, taxation, responsibility, existence, and flexibility. Though management accounting is applicable for managing operations of a business, and financial accounting is for providing external reports, it is crucial for the management of any business entity to understand these differences as they need to decide on which format of business entity is most suitable for their business.