Can a Partnership Own an LLC? Key Facts Explained

Key Takeaways

• A partnership can own an LLC, and an LLC can also be structured to operate like a partnership for tax purposes.
• When a partnership forms an LLC, the entity can provide liability protection while maintaining the flexibility of pass-through taxation.
• The IRS classifies multi-member LLCs as partnerships by default unless they elect to be taxed as a corporation using Form 8832.
• LLCs owned by partnerships can streamline operations and protect partner assets, but they must still file Form 1065 and provide Schedule K-1s to each member.
• Choosing between partnership or LLC status depends on liability preferences, management structure, and long-term tax strategy.
• Partnerships or LLCs with multiple members should have an operating agreement to define management rights and profit allocations.

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.

Understanding When a Partnership Can Own an LLC

Yes, a partnership can own an LLC. In fact, this type of ownership is relatively common when two or more partners want to limit personal liability while maintaining pass-through taxation. When a partnership owns an LLC, the LLC becomes a separate legal entity that shields the partners’ personal assets from lawsuits and business debts. This structure combines the operational flexibility of a partnership with the limited liability protections of an LLC.

Each partner’s ownership in the LLC is typically determined by their contributions, similar to partnership shares. For tax purposes, the IRS treats a multi-member LLC as a partnership by default, meaning the entity itself does not pay income tax. Instead, each member (including the owning partnership) reports its share of the LLC’s profits or losses on its own tax return.

This ownership structure is beneficial when partners want to create subsidiary entities for specific projects or investments while keeping liability limited to the LLC. It can also simplify management if the LLC serves as an operational arm for the partnership’s business ventures.

Tax Implications of a Partnership Owning an LLC

The IRS automatically classifies an LLC with more than one member as a partnership for tax purposes unless the LLC elects to be taxed as a corporation using Form 8832. When a partnership owns the LLC, the LLC’s income and losses flow through to the partnership, which then distributes them among its partners through Schedule K-1.

To ensure compliance:

• The LLC must obtain its own Employer Identification Number (EIN).
• The LLC files Form 1065, U.S. Return of Partnership Income.
• The parent partnership uses the LLC’s Schedule K-1 to report each partner’s distributive share of income or loss.

This layered structure can simplify tax reporting when multiple entities are involved but may also increase administrative requirements. If the LLC elects corporate taxation, it would instead file Form 1120, separating its tax obligations from the partnership.

Benefits of a Partnership-Owned LLC

Forming an LLC under partnership ownership offers several strategic advantages:

1. Limited Liability: Partners are not personally liable for the LLC’s debts or legal obligations, protecting personal assets.
2. Pass-Through Taxation: Income flows through the LLC to the partnership, avoiding double taxation.
3. Operational Flexibility: The partnership can maintain its decision-making framework while using the LLC for specific business ventures.
4. Asset Segregation: The LLC can hold assets, property, or intellectual property separately from the main partnership entity.
5. Ease of Conversion: A general partnership can convert into an LLC through state filing, maintaining continuity in ownership and operations.

These benefits make the LLC a preferred structure for professional partnerships—such as law firms or real estate investors—seeking to balance liability protection with flexible profit distribution.

Partnership vs. LLC: Key Differences

While partnerships and LLCs share pass-through taxation, they differ significantly in liability and formation requirements:

Because of these distinctions, many partnerships choose to form an LLC to gain legal protection and enhance business credibility while retaining favorable tax treatment.

Converting a Partnership into an LLC

A partnership may decide to convert to an LLC to gain liability protection or formalize its structure. The process usually involves:

1. Filing Articles of Organization with the state’s Secretary of State.
2. Creating an Operating Agreement that replaces the former partnership agreement.
3. Applying for a new EIN if required by the IRS.
4. Updating business licenses, permits, and bank accounts under the LLC name.

In most states, the conversion can be done through a statutory conversion, which automatically transfers the partnership’s assets and obligations to the LLC. The partners then become LLC members, preserving continuity in ownership and tax treatment.

Choosing Between Partnership and LLC Ownership Structures

The decision between remaining a partnership or forming an LLC often depends on business size, risk exposure, and tax strategy. Partnerships may suit small, low-risk ventures where personal liability is not a concern. However, when partners begin hiring employees, acquiring property, or taking on debt, forming an LLC provides significant protection.

In complex arrangements, such as when multiple partnerships co-own an LLC, the structure allows for greater separation of liability among ventures. This setup is common in real estate, professional services, and joint ventures where entities pool resources but want to protect individual assets.

If you are uncertain which structure best suits your business, consider consulting a qualified business attorney or accountant. You can also find experienced lawyers through UpCounsel, where vetted attorneys can guide you through forming or restructuring your LLC for optimal legal and tax benefits.

Frequently Asked Questions

1. Can a partnership own an LLC? Yes. A partnership can own an LLC, allowing it to operate as a separate legal entity that offers limited liability and flexible taxation.

2. How is an LLC owned by a partnership taxed? By default, the IRS treats a multi-member LLC as a partnership. The LLC files Form 1065, and income flows through to the partnership and its partners via Schedule K-1.

3. Why would a partnership form an LLC? To limit personal liability, separate assets, and gain a more formal business structure while retaining pass-through tax treatment.

4. Can an LLC be taxed as a corporation instead of a partnership? Yes. By filing Form 8832, an LLC can elect to be taxed as a C corporation, or file Form 2553 to be treated as an S corporation.

5. What’s the difference between a partnership and an LLC? A partnership offers simplicity but no liability protection, while an LLC provides personal asset protection, flexible management, and optional corporate taxation.

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.