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Home » Can a Partnership Be an LLC? Get the Answers You Need

Can a Partnership Be an LLC? Get the Answers You Need

January 11, 2017Estate Planning, Small Business Planning

If you’re wondering whether your partnership can ever be an LLC, then it’s time you learned the answer and got the asset protection you deserve.

Estate planning can be complex even under the simplest of circumstances. When you own your own business, however, that complexity seems to grow by leaps and bounds. Whether it’s asset protection, succession plans, or buy/sell agreements, there always seems to be some aspect of the company’s structure and operations affecting your overall estate planning effort. For those who share ownership of their company with another person, that partnership can raise other estate planning questions. For example, can a partnership be an LLC?

The Partnership vs the LLC

Since the limited liability company (LLC) structure allows for multiple owners – known as “members” – to maintain control over the company, it is reasonable to draw comparisons between partnerships and LLCs. Both are treated in a similar manner for purposes of taxation. For example, the owners are responsible for reporting any income or losses on their individual tax returns, based on the owners’ respective shares of the company.

Partnerships and LLCs are not the same thing, however. While partnership agreements can establish operational conditions that may make them appear to be all but indistinguishable from LLCs on paper, the two business entities share one important distinction that demonstrates just how different they truly are from one another. Partnerships do not offer the same type of personal asset protection that you can achieve with an LLC structure. It’s vital for new business owners to grasp this concept.

When you form partnership, you and your partners can set up your company to mimic many of the best features of an LLC. You can share in control of the company. You can each receive profits based on your contributions to the company’s operations. And so on. There is one thing that you can’t do, though; you cannot avoid personal liability when the company is sued, goes bankrupt, or has its assets threatened in other ways.

The limited liability company does exactly what its name suggests. It limits each owner’s liability to the amount of his or her contribution. When personal assets are kept separate from company assets, the LLC can provide a shield that prevents creditors and others from pursuing your private wealth as part of any civil action against your company. The partnership provides no such protection.

The Impact of Liability

To understand how this liability differs, just imagine a scenario in which your company is organized as a partnership and your partner commits the company to debt that it cannot reasonably repay. Under the terms of most partnerships, you are every bit as liable for that company debt as your partner. As if that isn’t bad enough, your personal assets – your home, car, bank account, and other wealth – could be vulnerable to creditor action, including civil litigation. Your partnership provides no wall of separation to shield your personal assets from your company liability.

Now imagine that same scenario, except this time your company is organized as an LLC and one of your partners runs up debt on behalf of the company, and the LLC ends up with more debt than it can service. What are your liabilities in that scenario? Well, you would still be partially liable, but only to the extent of your total contribution to the company. The structure of the LLC protects your personal assets, as long as you have never co-mingled them with the company’s assets.

Can My Partnership be Converted to an LLC?

If you currently have your business structured as a partnership and want to enjoy the benefits that an LLC can provide, there’s good news. It is relatively easy to convert your partnership to an LLC. Your attorney can help you to execute the process that being enjoying the benefits of the LLC, including the added asset protection that this organizing structure can provide. Of course, the conversion from partnership to LLC will enable you to maintain the same tax status as well.

While many general partnerships do provide a simple and easily-managed way for two or more individuals to jointly own and operate a business, it is easy to see why the LLC is a preferable option. Partnerships are simple, but that simplicity does leave you vulnerable to lawsuits and creditor actions. That can put stress on any efforts to build a financial or estate plan that can achieve your goals, since your personal assets will always be at heightened risk of being tied to any efforts to attack your business interests.

Converting to an LLC can be a great way to maintain much of the partnership atmosphere that you enjoy with your general partnership, while providing added asset protection and limitation of liability. Many multi-owner LLCs can feel like partnerships to those who run them, and terms in your articles of organization can reinforce that working relationship. Contributions, distributions, and other financial concerns can remain as they were.

Impact on Your Estate Plan

Your new LLC can make it easier to rely on your estate plan, since you will no longer have to be concerned about your partnership putting your personal assets at risk. Your plan can only truly be effective when you can have confidence in your financial projections. When your personal interests are always at risk due to business liability, it can make it difficult to rely on your estimates for financial growth, retirement savings, and legacy planning. The security you enjoy with an LLC can help to provide the certainty you need to more effectively align the different components of your estate plan.

While your partnership cannot literally be an LLC, you can convert it to a limited liability company and retain all the best features of your current business structure. At Frank & Kraft, Attorneys at Law, our estate and business planning attorneys can help you to ensure that you get the assistance you need to realize the best benefits that an LLC can offer. We know that the question isn’t “Can a partnership be an LLC” but rather, how can I retain the best features of your partnership while enjoying the added protection that limited liability company can offer? We’ll help you answer that question. To find out more, contact us online or call (317) 684-1100.

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Paul A. Kraft, Estate Planning Attorney
Paul A. Kraft, Estate Planning Attorney
Paul Kraft is Co-Founder and the senior Principal of Frank & Kraft, one of the leading law firms in Indiana in the area of estate planning as well as business and tax planning.

Mr. Kraft assists clients primarily in the areas of estate planning and administration, Medicaid planning, federal and state taxation, real estate and corporate law, bringing the added perspective of an accounting background to his work.
Paul A. Kraft, Estate Planning Attorney
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