The main differences between partnerships/sole-proprietorships and incorporation is in the liability the business owner(s) assume on behalf of the business.
In a sole-proprietorship, there is only one business owner who may also be the only employee of the business. Without incorporating a small business, the business owner assumes all liability for the business, should anything go wrong. The business owner takes responsibility for all debts and legal matters, including compensation for accidents and wrongdoings. If the business owner is successfully sued and does not possess the liquid assets to pay the plaintiff, the business owner’s personal property, including his or her home, car and possessions may be seized to meet the costs. Being sued as a sole-proprietorship is, in essence, exactly the same as being sued yourself, as a private individual. In addition, the business owner does not pay corporate taxes, only personal income taxes on profits made.
In a general partnership (there are other forms of partnerships that reduce liability), the business owners assume the same liability as the sole-proprietor, however it is more risky for each individual involved, as you may be held responsible for the actions of your partner(s). For example, if your business partner takes on several business loans and fails to pay them back, you may be held responsible for his or her actions if he or she is unable to be held responsible for them. Other than the shared liability, the differences between a general partnership and a corporation are very similar, in that your personal assets and property can be used to settle your debts or to pay the plaintiff if you are successfully sued.
But most importantly, in order to be incorporated, one must file paperwork with state and federal agencies, registering your corporation. This paperwork is known as « Articles of Incorporation. » Without filing them, your small business is not incorporated and you will not be recognized as such in any cases of taxation or liability.