Can an LLC Be A Partnership: Everything You Need to Know
Are you wondering, "Can an LLC be a partnership?" A general partnership is a business type rather than a legal structure. 3 min read
Are you wondering, "Can an LLC be a partnership?" A general partnership is a business type rather than a legal structure. A partnership is an informal or formal relationship among two or more people doing business together. Each partner must contribute something of value to the business. When partners do business together, they are considered collectively as one. All owners are responsible for the business' debts and each other. For tax purposes, any U.S. LLC with more than one member is considered a partnership.
After you the employee identification number, or EIN, is received, the partnership requires no further action. The partnership tax return is filed with Form 1065, which each member uses to prepare Schedule K-1 on their personal Form 1040. Each partner's share of deductions and income is shown on Schedule K-1.
Some states allow limited liability partnership. In this type of business:
- Partners are not exempt from liability for the debts of the partnership;
- Partners may be exempt from liability for actions of other partners.
Two or more people may own a business, but there are two classes of partners:
- General Partners
- Limited Partners
An LLP is basically a general partnership with the addition some limited personal liability. In all 50 states, LLPs are considered separate legal entities. This provision permits LLP members to conduct business, engage in contracts, incur debts, and hold assets for the company without worrying about adverse legal action being taken against them. LLP status also removes the entity's liabilities or debts from the members' responsibility, unless the member guarantees a debt or contract personally.
Partnerships Forming an LLC
Owners are exposed to liability as a partner, so they form an LLC and conduct their partnership business as an LLC. The LLC takes the full liability but shields the owners from personal liability. An LLC can choose to be taxed as a corporation if it does not want to be taxed as a partnership. If an LLC chooses to file as a corporation the LLC needs to:
- Complete The Entity Classification Election, Form 8832. Before the form is submitted to the IRS, all of the LLC's members must sign the Form 8832.
- File Form 8832 within 12 months of the election.
- Include a copy of Form 8832 when filing the initial tax return for the LLC.
- File Form 1120 with the company's U.S. Corporation Income Tax Return.
Taxation is solely on the owners, not the LLC itself. However, the members of the LLC must file Form 1065, which details the earnings of the partnership. The earnings are separated by income, deductions, and credits on Schedule K of the tax return. Schedule K-1 is prepared based on Schedule K, which lists how much of the earning goes to each member based on their percentage of ownership. The LLC then mails a copy of Schedule K-1 to each member. The partners all use the information on the Schedule K-1 to pay the appropriate taxes on the income they received.
The tax return the members of an LLC file depends on how they elect to be taxed. Even after several years of operation, an LLC that accepted the default partnership tax may still elect to change the filing status to a corporation by filing Form 8832. The rules that govern the election then apply. When the company begins earning a sizable income, members may choose to switch from partnership to corporation status.
Owners will only pay taxes on any dividends paid or distributions made to them by the LLC. As a partnership, the LLC pays no taxes. The owners pay on their LLC's profit even if the LLC does not actually distribute owner's funds. Therefore, if the owners expect sizable profits and they want to put the money back into growing the company, choosing to be taxed as a corporation offers the most personal tax protection.
Knowing how to structure your business can be difficult. If you need help with deciding if your partnership should form an LLC, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.