A partnership forms when two or more people decide to begin a for-profit business venture. Depending on the rules of the state where a C corporation is formed, a corporation may act as a partner of a partnership. There are no special documents that need to be filed in order to create a partnership. However, having a written partnership agreement in place helps partners avoid disputes and conflicts regarding how to operate business.
When a C corporation acts as a partner in a partnership, the company has a right to participate in all of the partnership’s business activities. This means the corporation can vote on various issues that affect the partnership, contribute capital to the business and assume any other rights granted to a partner by the terms of the partnership’s written agreement. Any contractual agreement entered into by a C corporation will bind the other partners of the business.
Limited Liability Status
A partnership cannot act as a separate legal entity from the partners of the business. This means partners have unlimited liability for business losses, debts, liabilities, judgments and other obligations that may arise while operating a partnership. A C corporation that acts as a partner in a partnership has an obligation to cover any business losses that may accumulate as a result of running the business, just like any other partner. For instance, if a partnership cannot meet its existing obligations, creditors may pursue assets from the partners. This places the C corporation’s business assets in harm’s way.
The Internal Revenue Service does not require partnerships to pay income taxes as a business entity. Each partner has the ability to pass their portion of the partnership’s profits and losses to their personal income tax return. In the case of a C corporation, the company reports profits and losses from the partnership on the company’s corporate tax return, also known as Form 1120. Unlike a C corporation, partnerships do not have the ability to deduct the cost of providing benefits, like life and death insurance, to the company’s employees.
Unlike a C corporation, partnerships lack the ability to issue stock as a way of raising money for the business. This means the partnership has to rely on the business and personal assets of its partners to raise funds. This could work against a partnership if partners lack adequate assets and credit with which to secure financing. Also, partnerships lack continuity, meaning the company could end if a partner dies, retires or decides to sell.