Florida law allows corporations to be partners in partnerships. The partnership can be a general partnership, a limited partnership (LP) or a limited liability partnership (LLP). Corporations are regarded as individuals under Florida law, and this legal status gives them the right to enter into partnerships as partners. The corporation could be any type of corporation that is given legal status under Florida law.
One type of corporation is an S-corporation. It can have at most 100 shareholders and generally, shareholders must be individuals who are citizens of the U.S., certain kinds of trusts and estates or some tax-exempt organization. So, other corporations or partnerships cannot directly own shares in an S-corporation. If they did, it would negate the S-corporation election.
However, an S-corporation itself can own interests in other business entities, including partnerships or limited liability corporations (LLC).
Having corporations as business partners offers some compelling advantages, perhaps primarily providing access to the resources that an existing corporation can bring to a business venture. It can also offer stability and business experience that might be especially valuable to a new partnership.
What Are the Legal Requirements for Forming a Partnership With a Corporation?
One of the main requirements for a corporation that wants to join a partnership as a partner is that the corporation’s articles of incorporation or bylaws allow it. The articles or bylaws must specifically provide that serving as a partner in another business partnership is part of the mission of the corporation.
Again, a corporation is considered a legal person, so it can legally act as a partner in a partnership. This means that a small partnership could include one natural person and one corporation, or 2 corporations, or an LLC and a corporation. Any combination is possible.
A partnership can have any number of partners, and they do not have to be natural people or U.S. citizens. This flexibility is one of the advantages of partnerships. It makes it possible to form a “tiered” business structure, where one entity owns part of another. For example, an S-corporation may own a partnership interest as a partner. This would be a tiered structure.
What Are the Advantages and Disadvantages of a Corporation Joining a Partnership?
One advantage is the combination of various skill sets and business resources that a corporation can bring to a partnership. Again, corporations generally have many shareholders, managers, and employees, so it can bring a wealth of resources to a partnership in the form of the personnel associated with it.
A corporation offers stability because if a leader or executive chooses to leave or passes away, the board of directors of the corporation can take over leadership or replace the leader or executive. Of course, a corporation may have other resources at its disposal that could be helpful to a partnership, such as facilities, equipment, personnel, and know-how.
Another advantage is that partnerships are allowed to distribute profits and losses among partners in almost any way agreed to by the partners in their partnership agreement. For instance, 2 partners might agree that one of them will get 60% of profits and the other 40%, even if they contributed equally. An S-corporation cannot easily vary its own profit distributions in this manner. They must practice the one-class-of-stock, pro-rata distribution principle.
A possible disadvantage is that general partners in a general partnership have unlimited personal liability for partnership debts. However, limited partners in an LP have liability limited to their investment, but an LP must also have that one general partner who has unlimited liability. It is possible for a corporation to serve in this role in order to serve as a shield to the individual partners in the partnership.
LLCs provide limited liability to all its shareholders, much like a corporation’s shield. Partnerships, especially general partnerships, can be formed with fewer formalities and less bureaucracy than corporations – sometimes just by a simple agreement.
It is important to remember, however, that an LP or LLP must be registered with the state. So a corporation that wants to expand its operations may find that forming a corporation to join is an easy way to do so.
There are tax complications for an S-corporation that receives partnership income. Usually, a partner in a general partnership receives their share of the partnership’s income and the partner must pay income tax on the share they receive. If an S-corporation with only one shareholder receives partnership income, it can report it as ordinary business income on its tax return.
The sole shareholder may receive a salary and the rest of the share of partnership profits as a distribution of corporate profits. The shareholder would have to pay income tax on both the salary and the profit distribution. But other required withholdings that must be made from a salary would not have to be paid and could be successfully avoided.
One possible disadvantage of having a corporation as a partner in a partnership is the possibility that the corporation has access to resources that most individual partners would not have. There is a risk that the corporate partner might become more dominant than the partners anticipated when they formed the partnership. The partnership agreement might help avoid this issue by carefully defining the roles and responsibilities of each partner.
What Are the Special Considerations for Corporations Serving as Partners?
There are mostly a variety of technical and financial considerations involved in corporations serving as partners. For example, utilizing losses strategically can be limited, so if a partnership expects to incur losses, the corporate partner may want to analyze how its corporate status would affect their ability to utilize the loss.
It is positive to note one thing and it is that having an S-corporation as a partner does not result in the imposition of an extra layer of tax on profits. The partnership does not pay tax on its profits. The S-corporation does not pay tax, at least not federal income tax, on pass-through items.
It is ultimately the individual shareholder who pays income tax on the distribution of partnership profits. In the case of an S-corporation with one shareholder, this is exactly as it would be if the one shareholder were a direct partner.
There are a variety of other technical considerations in connection with profit distributions, the paying of salaries and taxation. The partners and the leadership of the S-corporation would want to have a Florida lawyer consultation with a Florida lawyer to flesh out all of the possible consequences and make sure they align with the goals of both the partnership and the corporation.
Do I Need a Lawyer for Assistance With Partnership Laws?
If you are a corporation that sees a business opportunity in joining a partnership or a partnership that thinks a corporate partner could serve your business goals, you want to talk to a Florida corporate lawyer. Your lawyer can discuss your business goals with you, talk through the options, and decide whether this form of business entity is one that would best serve those goals, and if so, what type of partnership and what type of corporation would work best.
