What is a Limited Liability Partnership: The Ins and Outs of an LLP

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Are you planning to start a business and wondering which legal structure is right for you? Consider the option of a Limited Liability Partnership (LLP). With an LLP, you get to enjoy the tax benefits that come with partnerships and the flexibility of this business structure. Moreover, like starting an LLC, LLP offers the additional advantage of limiting personal liability about the company’s debts and legal proceedings.

The editorial team at LLCBase has accurately and reliably provided the definition and explanation of a Limited Liability Partnership. We have leveraged their knowledge and expertise to ensure the information is comprehensive and easy to understand.

What is a Limited Liability Partnership

A Limited Liability Partnership, commonly called an LLP, is a business entity that combines the features of a partnership and a corporation. An LLP is often an attractive business structure for professional practices primarily because it ensures the members’ legal protections similar to those of shareholders in a corporation. This corporate shield aids in protecting an individual partner’s personal assets from being seized to pay the obligations or debts of the partnership.

This factor is significantly beneficial, especially if the business is in a high-risk industry. For instance, in the event of malpractice, only the specific partner involved may be held personally liable without affecting the other partner’s personal assets, allowing individual limited liability while retaining the operation flexibility of partners.

Moreover, the structure of a limited liability partnership promotes internal flexibility, similar to a general partnership. In an LLP, all partners have a direct role in the business’s management. This means the partners have equal rights in the decision-making process of the business, unlike in a corporation where shareholders entrust decisions to directors and officers.

When initiating the formation of an LLP, it’s wise to consider hiring the best LLC formation services. Experienced professionals in this field can provide invaluable guidance on legal requirements, handle all necessary paperwork and ensure your formation documents are correctly filed.

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Top Things You Need to Know About LLPs

A Limited Liability Partnership, or LLP, is a business structure where partners have limited personal liability for the business’s financial obligations. It allows the partners to operate like a partnership while enjoying the liability protections of a corporation. Also, in an LLP, every partner is protected from the actions of other partners. It is important to know that the laws surrounding LLPs vary from jurisdiction to jurisdiction. Only professionals like accountants, lawyers, or architects can form LLPs in some areas.

1. Limited Liability and Profit-Sharing

In a Limited Liability Partnership, partners are not personally liable for the partnership’s debts and business obligations; however, they may be liable for their personal negligence or misconduct. The partnership agreement usually determines profit-sharing in a Limited Liability Partnership, but all partners may share equally if no such agreement is in place. Taxation in a Limited Liability Partnership is similar to a Limited Liability Company, where it is passed through to individual partners, thereby avoiding the double taxation issue that corporations face.

2. Membership and Management

Limited Liability Partnerships offer the advantages of both partnerships and corporations. Unlike corporations, management decisions in a Limited Liability Partnership are typically made by all partners, whereas the board usually makes directors’ decisions. A Limited Liability Partnership can have any number of partners – both individuals and entities. Unlike Limited Liability Companies, not all jurisdictions allow non-professionals to create Limited Liability Partnerships.

3. Scope and Benefits

Limited Liability Partnerships are commonly used by professionals providing services as they offer the flexibility of a partnership and the limited liability of a corporation. They are ideal for businesses with multiple owners or those who want to keep their personal assets separate from their business. Like Limited Liability Companies, Limited Liability Partnerships have fewer regulations and are less administratively burdensome than corporations. Like any business structure, Limited Liability Partnerships have advantages and disadvantages, and it is important to analyze your business needs before forming a Limited Liability Partnership.

4. Partnership Agreement

The agreement in a Limited Liability Partnership is similar to the operating agreement in a Limited Liability Company. It outlines each partner’s contributions, liabilities, profit share, responsibilities, and withdrawal or dissolution procedures. It also dictates how the Limited Liability Partnership is to be run. While not all jurisdictions require such an agreement, it is important to have one to outline expectations and prevent any future conflicts.

5. Changes in a Limited Liability Partnership

Changes in a Limited Liability Partnership, such as the departure or addition of a partner, typically require amendments to the partnership agreement. Many jurisdictions also require that a Limited Liability Partnership inform the registrar of changes in partnership or management. A Limited Liability Partnership continues to exist regardless of changes in partnership, which is not the case with a Limited Liability Company. As such, a Limited Liability Partnership can be a more stable business structure than a Limited Liability Company. Establishing procedures for managing partner changes in the partnership agreement is critical.

Pros
  • Limited Liability: Protects each partner’s personal assets.
  • Tax Benefits: Avoids double taxation.
  • Flexibility: Partners have better control of the business.
Cons
  • Limited Duration: The entity exists only as long as the partners in the LLP remain the same.
  • Personal Liability for Own Actions: Each partner is liable for their actions.

Getting Started with Your Limited Liability Partnership

Certain legal steps must be taken to commence a Limited Liability Partnership. These core points cover the basics involved in setting up an LLP. More information can be found in our comprehensive guide about LLPs and a step-by-step guide to understand the process better.

Step 1: Confirm Eligibility

Professional businesses such as lawyers, accountants, and architects are usually eligible to form a Limited Liability Partnership with the state. Ensure your business fits these criteria before initiating the process.

Step 2: Choose a Business Name

Select a name reflecting your brand identity, including “Limited Liability Partnership” or “LLP.” Remember to reserve the name with the state agency for 90 days. When conducting a name search, LegalZoom can assist you in determining the availability of your chosen business name.

Step 3: Appoint a Registered Agent

This individual or entity will be your proxy for receiving legal documents and correspondence. They should be located within the state and available during business hours. Please select the best registered agent services from our carefully curated list for your business needs. These services offer top-notch handling of legal documentation and assist in seamless business operations.

Step 4: File Required Documents

These typically include the Articles of Organization, which detail the LLP’s name, registered agent, partners, and business objectives. It is submitted to a state body, with filing fees vary by state.

Step 5: Secure an EIN

This tax identification number from the IRS is essential for tax filing, setting up a bank account, and hiring personnel. Apply online or use Form SS-4. Elevate your business by securing an EIN with a top-rated business service like LegalZoom. Experience stress-free, quick, and tailor-fitted assistance to streamline your business needs efficiently.

Step 6: Obtain Licenses and Permits

Depending on your services, your business might need certain licenses or permits from the Secretary of State or local agencies to operate legally. Keep abreast of all necessary compliance requirements. Square away your legalities with a dependable LegalZoom license and permit service.

Step 7: Submit a Certificate of LLP

This document is crucial for tax purposes and includes information about partners, their contributions, and profit-loss distribution information. It should be filed with the Secretary of State for tax registration.

Step 8: Draft a Partnership Agreement

This document delineates each partner’s rights, responsibilities, and ownership stakes. Include details about management structure, decision-making policies, profit sharing, and partner addition or removal procedures. A personalized agreement can mitigate potential disagreements and foster smooth operations.

Step 9: Comply with State Regulations

Investigate other state-specific rules such as annual report filing, maintaining factual records, or obtaining state professional licensing board certification to remain in good standing.

Step 10: Adhere to Federal Regulations

Depending on your services, you may be required to comply with federal regulations, licenses, permits, or industry regulation stipulations. Stay updated and adhere strictly to avoid non-compliance consequences. 

Step 11: Open a Business Bank Account

This is necessary for managing finances, monitoring expenses, and segregating personal and business finances. You will likely need your LLP registration documents, the EIN, the operating agreement copy, and personal partner identification.

Step 12: Register for State Taxes

Register for state taxes with the Department of Taxation. Depending on your location and the nature of your work, you may need to register for payroll, franchise, and sales tax permits. Consult a tax professional to avoid possible penalties and fines due to non-compliance.

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Limited Liability Partnership vs. LLC

A Limited Liability Partnership (LLP) varies from a Limited Liability Company (LLC) in numerous aspects despite sharing commonality in limiting personal liability. One of the most prominent differences lies in their business structure and the tax benefits they provide. In an LLP, every partner has an equal right to manage the business operations, with their liability only extending to the amount of their investment in the partnership.

This protects each partner from the business’s liabilities that their personal liability insurance may not cover. Furthermore, LLP is commonly favored by professional groups like attorneys, architects, and accountants who demand operational flexibility, and it provides a shield against joint liability for professional misconduct of the partners.

Contrastingly, LLC adheres to a more structured corporate business model and is popular among single-owner companies. This structure protects members from personal liability for business decisions or any action the LLC takes. If the LLC incurs debt or faces litigation, members’ personal assets are not within reach.

Additionally, an LLC has a more flexible profit distribution system and a multi-tiered membership structure. Another significant difference is taxation, as an LLC is entitled to be taxed as a sole proprietorship, a partnership, or a corporation, which can result in potential tax benefits.

Limited Liability Partnership vs. Limited Partnership

A Limited Liability Partnership (LLP) and a Limited Partnership (LP) are business structures that offer varying levels of protection and benefits to their partners. An LLP is an attractive option for businesses in sectors requiring substantial liability coverage, such as consultancy, law, or accountancy, due to its offering limited liability protection to all its partners.

This implies that individual partners are not personally responsible for other partners’ negligent actions or business debts and liabilities. Each partner in an LLP is only liable to the extent of their investment in the business, ensuring their personal assets are safe from creditors and bankruptcy proceedings.

On the other hand, in a Limited Partnership (LP), partners have different levels of liability based on their role in the business. An LP is formed with at least one general partner and one limited partner. The LP’s general partner(s) have unlimited personal liability, meaning they are subject to bear financial losses, including any debts or legal claims against the business.

On the contrary, the limited partner(s) have their liability limited to their invested capital in the business. They are not personally responsible for business debts or legal liabilities beyond their investment. Therefore, while both business structures have their benefits, LLP is often more appealing because it offers limited liability protection to all partners. This is a significant relief, especially in professions with high liability coverage.

Limited Liability Partnership vs. Corporation

A Limited Liability Partnership (LLP) and a Corporation are distinct business entities with unique features, benefits, and drawbacks. An LLP is a partnership structure where every partner holds limited liability. This implies that the financial responsibility of each partner is limited to their investment in the business, and they are not personally liable for the business’s debts.

Furthermore, each partner in an LLP is protected from being held responsible for the actions or misconduct of the other partners. This unique trait makes the LLP structure a preferred choice for professional firms such as law practices, accounting firms, and architecture agencies, where each professional’s liability can be isolated.

On the other hand, a Corporation is a much more structured business entity legally considered separate from its owners. In a corporation, shareholders hold ownership, but board members elected by the shareholders run the company. Unlike in an LLP, where profits are taxed once as personal income, corporations are subject to double taxation. This means that the corporation’s profit is taxed, followed by the dividends distributed to shareholders being taxed as personal income.

However, the separate legal status a corporation provides protects shareholders’ assets, meaning that they cannot be held accountable for the corporation’s debts or actions. Therefore, while an LLP provides personal asset protection and avoids double taxation, a Corporation is suitable if owners need more structural organization and robust asset protection.

FAQs

What is a Limited Liability Partnership (LLP)?

A Limited Liability Partnership (LLP) is a business structure that combines the flexibility of a partnership with the liability protection found in corporations. Unlike shareholders in a corporation, LLP partners have the right to manage the business directly.

How does profit-sharing work in an LLP?

Profit-sharing in an LLP depends on the agreement between the partners. Usually, it’s divided equally among partners, but it could also be distributed based on each partner’s capital contribution.

What is the principle of membership in an LLP?

An LLP involves two or more partners agreeing to share a business’s profits or losses. Each partner can directly contribute to managing the business.

What is the scope of an LLP?

The scope of an LLP is typically defined in the partnership agreement. It spells out the nature of the business activities that the LLP will undertake.

What are the benefits of an LLP?

Some benefits of an LLP are limited liability protection for partners, tax advantages, less regulation than corporations, and administrative and management flexibility.

What is the partnership agreement in an LLP?

The partnership agreement is a legal document that outlines shared responsibilities, profit/loss distribution, dispute resolution methods, and provisions for changes in the partnership.

Can changes be made in an LLP?

Yes, changes can be made in an LLP based on the clauses mentioned in the partnership agreement.

How to start an LLP?

Starting an LLP typically involves drafting a partnership agreement, registering the LLP with the relevant state agency, and obtaining licenses and permits necessary to conduct business.

How does an LLP differ from an LLC?

An LLP gives all partners the right to manage the business directly, unlike an LLC, where appointed managers typically manage.

How does an LLP compare with a Limited Partnership?

Unlike a Limited Partnership, where there is at least one general partner with unlimited liability, all partners in an LLP enjoy limited liability protection.

Does an LLP offer more protection than a corporation?

In an LLP, partners are not personally liable for the actions of other partners, whereas, in a corporation, shareholders can potentially be held responsible.

What happens if a partner leaves an LLP?

The partnership agreement typically outlines the procedure for a partner leaving an LLP. Other partners may buy out the departed partner’s shares.

Is it necessary to register an LLP?

Yes, it is typically necessary to register an LLP with the appropriate state agency.

What is the legal status of an LLP?

An LLP is a separate legal entity from its partners. Therefore, the LLP can own property, enter into contracts, sue, or be sued.

What kind of businesses typically form LLPs?

LLPs are common for professional services firms like lawyers, accountants, and architects due to the limited liability protection it offers.

Do all states recognize LLPs?

Most U.S. states recognize LLPs, though there may be state-specific limitations and regulations.

Is a partner in an LLP considered an employee?

No, partners in an LLP are typically not regarded as employees; rather, they are considered self-employed.

How is an LLP taxed?

An LLP is typically taxed as a partnership, with profits and losses passing through to the partners’ personal income tax.

Can an LLP have a single partner?

No, an LLP must have at least two partners. If an LLP drops to one partner, it can lose its status as an LLP.

Can a partner be added to an LLP?

Yes, a partner can be added to an LLP as long as the partnership agreement allows for the addition of partners.

Conclusion

In conclusion, a Limited Liability Partnership (LLP) is a popular business structure that combines the benefits of partnerships and corporations. It provides its partners flexibility in managing the business while offering them limited personal liability for business debts and lawsuits. This means that each partner is only responsible for their own actions and investment, not those of their partners.

The combination of flexibility and safeguarding personal assets makes LLPs appealing to many small businesses, especially for professionals like lawyers, accountants, and architects. However, as with any business decision, one must consider the nature of the business, potential growth, and specific legal requirements before forming an LLP.

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