Convert S Corp to Partnership: Everything You Need to Know
If you want to convert S corp to partnership, it is imperative to understand the pros and cons of doing so.3 min read
If you want to convert S corp to partnership, it is imperative to understand the pros and cons of doing so. S corporations have the option to change their business operations and run as a partnership. Likewise, a partnership can choose to operate as an S corporation. These two types of entities share many similarities, but it's always a good idea to talk to a professional accountant within your state to ensure the changes you want to make are in your business's best interest.
In a partnership, all owners have a stake in the business. A partnership's legal agreement will decide how profits and losses are distributed based on the owners' percentage of ownership, and ultimately, how the assets are distributed if the business sells or fails. This agreement will also outline the following:
- Who owns the business.
- Operational practices.
- How to handle disputes.
How Is a Partnership Taxed?
A partnership will be taxed according to a taxation method known as pass-through; this same method applies to an S corporation as well. This means the profits and losses pass through the company and are distributed to the partners. The partners/owners are responsible for reporting the profit and losses on their individual tax returns.
What Is a Partnership Agreement?
A partnership agreement is the most common method used when setting up the rules, obligations, and terms that the partnership will operate under. The agreement will define and describe in detail profit allocations, partnership roles, and responsibilities, among other functions.
While the agreement is not mandatory, if drafted properly, it is a legally binding agreement that will have legal standing in the event there are disagreements between owners.
How to Change a Partnership
The first step for an S corporation to take in order to change to a partnership involves the owners having to dissolve the company. In order to dissolve the company, the owners must file an articles of dissolution or a certificate of dissolution with their state government agency. The exact form that is required will vary from jurisdiction to jurisdiction.
Before the S corporation is dissolved, owners may need to get tax clearance. The next step after dissolution is to file the articles of organization with the state government. In addition, there are filing fees to be paid. Furthermore, to set up the new business, the entity will have to file a business name and register the business with the local government. These are all general startup rules and each state will vary in what is required.
What Are the Advantages of an S Corporation?
There are a few advantages worth noting when it comes to running an S corporation as opposed to a partnership. In a corporation, if the company is sued or financially fails, the owner's assets are not touched to pay the debts. In a partnership, all the partners will be held liable.
S corporations also have the option to raise capital by offering a class of stock, while a partnership must rely on contributions, loans, or angel investors to raise capital. Furthermore, the ability of an S corporation to sell both voting and nonvoting shares helps mitigate any loss of control when and if new members join the S corporation.
What Are the Advantages of a Partnership?
There are advantages to operating as a partnership as well. S corporations are limited to 100 shareholders, while a partnership can have an unlimited amount of owners. In addition, a partnership is not mandated to hold annual meetings, record minutes, or keep financial records to the extent that an S corporation is required.
Depending on the state in which you live, partnerships are often exempt from paying some of the same types of taxes imposed on S corporations. The flexibility to allocate income and losses to its members is another advantage. S corporations must allocate on a per-share, per-day basis.
Contact a Professional Business Attorney
One of the smartest moves you can make as a business owner is to contact a reputable attorney who is knowledgeable in business law. This is of the utmost importance when you are trying to convert S corporation to a partnership. The attorney can discuss the pros and cons of such a conversion and then guide you through the process.
If you need help with converting s corp to 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.