Corporations can act as partners in a partnership because states allow corporations to perform many of the same activities as individuals, such as entering into contracts, owning property, and hiring employees. In a partnership, the corporation would have various duties and responsibilities as would any individual acting as a partner. It could be advantageous to have a corporation as a partner under certain circumstances because corporations have legal and financial protections for those who run them that individuals do not have.
So while a general partner who is an individual would have unlimited liability for the debts of the partnership and the assets of a general partner can be seized to satisfy liabilities, the same would hold true for a corporation. A general partner may be sued for collection of the partnership’s debts.
If a corporation is a partner, the corporation as partner would be eligible to receive a share of the profits, and it would be responsible for the debts, judgements and settlements of the partnership as well. However, only the assets of the corporation and not those of its shareholders, officers or employees can be used to satisfy the debts and other liabilities of the partnership. An officer of the corporation would usually sign a partnership agreement on behalf of the corporation.
A general partnership is not considered to be an independent entity. State law determines whether a corporation can be a shareholder in a partnership. The majority of states allow a partner to be an individual, another partnership, a corporation, a trust, or a limited liability company (LLC).
An S corporation can also be a partner in both a general partnership and a limited liability partnership. An S corporation is a corporation formed under the authority of the Internal Revenue Code that is allowed to pass corporate income, losses, deductions, and credits through to its shareholders for federal tax purposes. Shareholders of S corporations report the income and losses that flow to them from the S corporation on their personal tax returns. In this way S corporations avoid double taxation on the corporation’s income.
To qualify as an S corporation, a corporation must meet the following requirements:
- It must be a domestic as opposed to a foreign corporation;
- It must have only certain, specified allowable shareholders;
- Shareholders may be individuals, certain trusts, and estates;
- Partnerships, corporations or non-resident alien shareholders are not allowed to be shareholders in an S corporation;
- It can have no more than 100 shareholders;
- It can have only one class of stock;
- It cannot be an ineligible corporation, i.e. certain financial institutions, insurance companies, and others as specified in the Internal Revenue Code.
Operating as an LLP does not shield a partner from liabilities caused by the partner’s own negligence. However, if an S corporation participates in an LLP, it provides a shield against liability for negligence on the part of its shareholders. An LLP can even consist of more than one S corporation. In some states, only attorneys and accountants can form an LLP. LLPs are required to file an annual registration renewal. Otherwise, it might lose its limited liability protection, which would make the partners vulnerable to claims on their personal assets.
In states that limit the business form that people with professional licenses can choose, the participation of an S corporation in an LLP can provide the full liability protection the owners seek.
As mentioned above, tax law limits the number of shareholders in an S corporation to 100. However, a partnership of S corporations lets its shareholders avoid this limitation. For example, suppose a group of people want to operate their business as an S corporation but there are 200 people involved. This group can do business as a partnership with two S corporations of 100 shareholders each.
Both individuals and corporations can enter into both limited partnerships and general partnerships. In a general partnership, of course all partners, even corporate ones, participate in the daily operation of the business. All partners are also equally expected to pay the liabilities of the partnership. On the other hand, investors enter into a limited partnership as limited partners when they do not wish to be actively involved in the daily operations of the enterprise.
The partnership is referred to as “limited” because each partner’s liability is limited. For instance, if a corporation plans on investing in a company that is just starting up, the limited partner corporations also will not be liable for the debts incurred by the business except to the extent of their buy-in to the limited partnership.
A general partnership is not a legal structure. However, it is considered an official relationship between groups of people running a business together. Owing to the liability exposure that general partners have, the business of the general partners may decide to become a corporation. When they become a corporation, they are open to complete liability as general partners. But their corporation will protect them from personal shareholder’s liabilities
Though a limited liability partnership offers a higher degree of legal protection, introducing a corporation into the business arrangement as a partner can make things more complicated. Therefore, the people involved in the enterprise would be well advised to consult an experienced business lawyer in their state to confirm that the law in their state allows limited partnerships with corporations or S corporations as partners.
