Many professional business owners provide services via partnerships or corporations. Some states require that certain professionals, including accountants and attorneys, operate as a professional corporation, limited partnership or limited liability partnership. In states that restrict the business form that professionally licensed individuals can choose, the combination of an S corporation with a limited liability partnership or LLP can provide the full liability protection the owners seek.
Corporations as Partners
Corporations, including S corporations, can serve as general partners in a partnership. General partnerships are not legal structures but are considered a formal relationship between two or more people doing business together. A corporation is legally considered a "person" in nearly all situations. Because of the liability exposure that you have as a general partner, your business may choose to organize as a corporation. By doing this, you are open to full liability as a general partner, but your corporation will shield you from personal liabilities as a shareholder.
As a general partner, your corporation can be an S corporation, because the subchapter S status is an Internal Revenue Service designation, not a state designation. IRS restrictions on S corporations do not prevent them from entering into partnerships. Although an LLP provides a number of protections to you as a partner, operating as an LLP does not protect you from liabilities arising from your personal negligence. If you form an S corporation and enter into the partnership via S corporation, your S corporation shields you from negligence liabilities.
Limited Liability Partnership
A limited liability partnership begins life as a general partnership then formally registers with the secretary of state to become an LLP. With a general partnership, as a partner you have joint and several liability, meaning you are not only responsible for your business debts and obligations but also for the business's and other partners' liabilities. Registration as an LLP limits your liability as a partner to the loss of your investment in the LLP.
Read More: Pros & Cons of a Family Limited Liability Partnership
Your LLP can have more than one S corporation involved. All the LLP partners can be S corporations. However, in some states, only accountants and attorneys can register as LLPs. Confirm with your state’s secretary of state. If you choose to register as an LLP, you must promptly file your LLPs registration renewals each year. If you do not, your LLP status may "retire" or lapse. All partners would then be fully liable for any claims that arose during the lapse.
Tiffany C. Wright has been writing since 2007. She is a business owner, interim CEO and author of "Solving the Capital Equation: Financing Solutions for Small Businesses." Wright has helped companies obtain more than $31 million in financing. She holds a master's degree in finance and entrepreneurial management from the Wharton School of the University of Pennsylvania.