What Is the Difference Between a Partner & a Shareholder?
A partner is someone who helps own and operate a company established as a partnership in a particular state. A shareholder is an investor in a corporation. Each role offers you distinct benefits and risks as someone looking to make money in business.
In a general partnership, each partner shares in the profits and risks of operations. In a limited partnership, a general partner assumes primary roles and responsibilities, and limited partners can invest in the business without taking on active responsibilities and personal financial liability.
A general partner is able to share in the profits of the business and leverage the strengths and expertise of other owners, but spread out the risks. In some cases, a key partner creates new business channels or supply relationships that spark greater profitability than what an individual owner could generate as a sole proprietor. With a limited partnership, general partners can attract investors and avoid loan financing. This structure is useful for someone who wants singular control, but shared financial investment.
As a general partner, you have unlimited liability, which means your personal assets aren't treated separately from those of the business. Therefore, if the company is sued, you could experience financial ruin. Relative to a proprietorship, partnerships add to this unlimited liability risk because of the obligation one partner has for the poor actions of another. Sharing control and decision-making with partners is a drawback for some, though limited partnerships structures offer a way out of this scenario.
As a shareholder, you invest money in a corporation by purchasing a certain number of shares of stock. Each stock carries a fractional portion of ownership in the business. For an entrepreneur, structuring your business as a corporation allows you to separate the company from your personal assets.
Because it is treated separately, you have limited personal liability with a corporation. You do have to complete regular paperwork through a state office, but your assets aren't exposed, unless you act illegally, unethically or neglectfully. Another major benefit is that a corporation can attract equity investors to raise capital, whereas partnerships must seek private investment from a limited partnership or acquire debt.
As a shareholder, you risk depreciation in the value of your shares if the business fails to generate a profit and attract additional investors. It also tends to be more time-consuming to set up a corporation than to enter a partnership. Another major drawback for shareholders is that corporate profits are taxed before you receive income distributions. You must then pay taxes on your earnings. Partners don't face this double-taxation problem.