Can an S Corp be a partner in a partnership? Yes! In fact, it's quite common for business owners to layer business entities to provide them with privacy, enhance protection from personal liability, and take advantage of tax breaks. Certain business entities are allowed by federal and state law to function as individuals, allowing them to own shares in other businesses.

Corporations offer easy stock transference and a high level of personal liability protection, making them the ideal business entity to own shares in another company. Professionals such as lawyers, accountants, and doctors often practice through corporations or partnerships. In some states, certain professions must offer services through a limited partnership, limited liability partnership, or professional corporation. In these states, these individuals can combine one of these entities with an S corporation to limit their personal liability.

In addition to limited liability, S corporations offer a tax advantage. However, they are subject to a limit of no more than 75 shareholders, strict profit-splitting rules, and rigid ownership restrictions.

Corporations as Partners

Any corporation can be a partner in a general partnership, including an S corporation. While a general partnership is not a legal entity, it is a formal business relationship between at least two people. In most legal situations, a corporation is treated as a person. Organizing as a corporation allows a general partner protection from personal liability. The corporation can do most things an individual can do, including owning property, entering into contracts, borrowing money in its name, and hiring employees.

Partnership Characteristics

When a corporation owns a share in another company, this asset is considered the personal property of the corporation. Thus, a corporation can both hold stock in or ownership of a subsidiary corporation. The same holds true for a limited liability company or other independent entity. 

Because a partnership is not considered an independent entity, whether a corporation can be a shareholder in a partnership depends on state law. Most states allow a partner to be an individual, another partnership, a corporation, a trust, or a limited liability company (LLC). Under this definition, a corporation is treated as a person and thus can participate in a partnership.

In a general partnership, each person carries individual liability for business debts. However, when one partner sets up a corporation to act in his or her stead as a partner, liability for business obligations shifts from the individual to the corporation.

This scenario is common when establishing a limited partnership (LP) in which one partner must have unlimited liability, but the other has limited liability. The partner with unlimited liability sets up a corporation as a liability shield.

S Corporation Characteristics

In the scenario described above, the corporation can be an S corporation. Operating as an LLP does not shield you from liabilities caused by your own negligence. However, entering this type of partnership as an S corporation does provide a shield against liability brought by negligence. If you opt to take this route, keep the following in mind:

  • Your LLP can be comprised of more than one S corporation.
  • Only attorneys and accountants can form an LLP in certain states.
  • LLPs must file an annual registration renewal promptly. Otherwise, limited liability protection may lapse, opening the partners up to claims on their personal assets.

LLP Characteristics

To create an LLP, you must formally register your general partnership with the Secretary of State. This limits your personal liability to your investment in the LP, whereas all partners in a general partnership carry full liability.

Shareholder Limitations

An S corporation can have up to 100 shareholders. However, you can get around this regulation by setting up a limited partnership owned by several S corporations, each of which can have 100 shareholders. This provides you with the same tax benefits as an S corporation without the shareholder limit, since a partnership has no limits as far as the number of owners.

If you need help with forming a corporation or partnership, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.