How to Protect Business Assets in an S Corporation vs. Partnership

By Heather Frances J.D.

Choosing a business structure is one of the first steps you must take when establishing your business and state laws generally offer several business formats, including corporations and partnerships. Decisions regarding the legal structure to use when starting a new business are often affected by the owner’s desire to separate business assets from personal assets. For example, partnerships offer little asset protection, but S corporations limit personal liability.

Choosing a business structure is one of the first steps you must take when establishing your business and state laws generally offer several business formats, including corporations and partnerships. Decisions regarding the legal structure to use when starting a new business are often affected by the owner’s desire to separate business assets from personal assets. For example, partnerships offer little asset protection, but S corporations limit personal liability.

S Corporation Advantages

S corporations are similar to regular corporations, or C corporations, but S corporations must meet certain requirements to obtain S corporation status from the Internal Revenue Service, including having no more than 100 shareholders and only one class of stock. This S corporation status allows the business to be taxed as a disregarded entity, similar to a partnership where the business’s income is taxed on each partner’s personal taxes. This can be an advantage over a C corporation in which corporate profits are taxed once at the corporate level and again on the shareholders’ personal taxes when they receive distributions.

Ready to incorporate your business? Get Started Now

Separate Legal Status

S corporations are independent legal entities while partnerships are alter egos of their owners. Thus, S corporation assets are titled in the name of the corporation while partnership assets can be titled in the individual names of the owners. For example, if your corporation owns a vehicle, the vehicle title, loans and insurance must be titled in the name of the corporation rather than your own name. This keeps the vehicle legally separate from your own personal assets. If you were part of a partnership, you could keep your vehicle titled in your own name without affecting the legal status of the vehicle.

Personal Debts

Personal creditors of an S corporation’s shareholders cannot attach the assets of the S corporation to pay a shareholder’s debts. Thus, if a shareholder owes money to a creditor, the creditor cannot seize corporate assets to pay that debt. However, creditors can seize partnership assets to pay the personal debts of one partner since there is no legal distinction between the partnership and each partner. For example, if you owe $50,000 to a creditor, he cannot take your corporate assets but he can take your partnership’s assets. This is particularly likely if you do not have sufficient personal assets to cover your own debts. Thus, you may benefit from structuring your business as a corporation to protect your business’ assets.

Business Debts

Unlike partnerships, S corporations allow shareholders to protect their personal assets from liability for corporate debts. Since partnerships are not separate legal entities, the personal assets of the partners can be taken to pay business debts. Corporations must use their business assets to pay business debts since shareholders are not personally liable for the debts. Shareholders may lose all of the money they invested in the corporation, but are not liable to pay more than that, even if the business does not have enough money to cover its debts. Partnerships, too, must pay their business debts, but partners must chip in to pay those debts if the business assets are insufficient to pay them in full.

Ready to incorporate your business? Get Started Now
General Partnership Vs. LLC

References

Related articles

Can Business Assets Be Touched if You File Personal Bankruptcy?

If you are self-employed and think you might need to file for personal bankruptcy protection, your case is probably going to be a bit more complicated than if you worked for someone else. There are various types of business entities and bankruptcy treats them differently – the rules aren't one-size-fits-all.

Differences Between an LLC & an S Corp

Limited liability companies, or LLCs, and Subchapter -- or S -- corporations are legal formation options to consider when starting up your small or family-owned business. An LLC can take the taxation form of a partnership or a corporation, so an LLC and an S corp are not mutually exclusive. However, most LLCs are organized as partnerships.

Advantages & Disadvantages of a C-Corp or S-Corp

The U.S. Tax Code and IRS recognize two different types of corporations: the C corporation and the S corporation. The two business types are taxed in two different ways. The C corporation pays taxes on its annual income and then its shareholders pay tax on any dividends they receive from the business. With an S corporation, the business does not pay any tax on its annual income. The shareholders are responsible for paying taxes on their share of the business’s annual income. As a result of this difference in how these organizations are taxed, C corporations and S corporations have different restrictions on several aspects of their business.

LLCs, Corporations, Patents, Attorney Help

Related articles

Does Filing a Business Bankruptcy Take One's Home?

Depending on how your business is structured and what type of bankruptcy you file, filing bankruptcy on business debts ...

What Is Bad About Proprietorship?

A sole proprietorship refers to a business owned and operated by one person who hasn't made a legal entity selection ...

Similarities Between Sole Proprietorships and Partnerships

If you are interested in sending a message that you are willing to take personal responsibility for the success and ...

Advantages and Disadvantages of Sole Proprietorships

When you start your business, one of the first decisions you’ll have to make is what form the business should ...

Browse by category