Can an S Corporation Be a Partner in a Partnership

As a general partner, your business may be an S Corporation because the status of Subchapter S is a designation of the Internal Revenue Service and not a government designation. The IRS`s restrictions on S companies do not prevent them from associating. While an LLP offers you as a partner a number of protections, operating as an LLP does not protect you from liability arising from your personal negligence. If you form an S Company and enter into a partnership through S Corporation, your S Corporation will protect you from liability for negligence. An S company is simply a company incorporated under state law that has made a special election under the Internal Revenue Code to pass on all of the company`s income to its individual shareholders to avoid double taxation. It cannot have more than 100 shareholders and must limit those shareholders to individuals and certain trusts, estates and not-for-profit organizations. In fact, a partnership is not allowed to be a shareholder in an S-Corporation. However, the opposite is not the case, since an S corporation is a corporation and therefore a “person” who is authorized to be a partner under the State Partnership Laws. The choice of a company under the Internal Revenue Code does not affect its ability under state law to become a partner in a partnership, including an LLP.

And just to make that point. It doesn`t matter that Tom`s S Corporation and Jeff`s S Corporation treat their shareholders differently. The two S companies are different entities. Thus, 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 the liabilities, this would apply to a corporation. A general partner may be sued for the recovery of the company`s debts. To qualify as an LLP under state law, a partnership must generally register with the appropriate government entity and include the words Registered Limited Liability Partnership or the acronym LLP in its name. Some states also require an LLP to provide proof of liability insurance or reasonable assets to settle potential claims against the partnership. In addition, an LLP may be required to submit an annual report to government agencies.

Tip: If you want more information about who can and cannot own an S Corporation, check out this FAQ article: Who can be a shareholder of S Corporation? In the scenario described above, the company may be a company S. Operating as an LLP does not protect you from liabilities caused by your own negligence. However, entering into this type of partnership as an S-Corporation provides protection against negligent liability. If you choose this route, remember the following: Let me mention a related wrinkle just for the sake of completeness: An LLC owned by a single S company could also be treated as a qualified subsidiary of Subchapter S (also known as QSUB) if the LLC and the member file the appropriate documentation and the LLC was treated as an S company prior to the acquisition of the S Corporation member. In this case, the income and deductions of the QSUB are only reported on the declaration of the “parent company”. (Read this FAQ article if you want to know more.) What about LLCs with a single member? From a tax point of view, the income is transmitted to its only member via the single-person LLC. Therefore, whether or not the one-person LLC is allowed to hold a stake in an S company depends on the specific circumstances: and here`s why: S companies offer great tax savings, but unfortunately, they come with fairly strict restrictions: restrictions on the number of shareholders, rigid rules for profit sharing, and then strict restrictions on the type of people, who can become owners. In this case – and tax accounting will only be a little more work – you can run your 200-shareholder business with all the benefits of an S company, even if you`re above the 100-shareholder limit. To create an LLP, you must officially register your partnership with the Secretary of State.

This limits your personal liability to your investment in the SQ, while all shareholders of a partnership assume full responsibility. For natural and legal persons such as companies, it is sometimes advantageous to enter into business partnerships together. .