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.
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 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.
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.