What is a Limited Liability Partnership?
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What is a Limited Liability Partnership?
The Limited Liability Partnership (LLP) is a form of business structure used primarily by professionals like attorneys, accountants, physicians, engineers, dentists, and architects. A business must have two partners to form an LLP, and usually, the partners must be licensed in the same profession.
The LLP is essentially a General Partnership, allowing all partners to act as general partners and be involved in the management of the business, but with the added benefit of giving all partners limited personal liability. This is different from a Limited Partnership, in which one partner has control over management and assumes personal liability while other partners have invested financially but are silent regarding how the business should be run.
In the United States, each state has its own law regarding the formation of Limited Liability Partnerships. Some states allow any business with two or more partners to form an LLP while others (such as California, Nevada, New York, and Oregon) allow only professionals in specific industries to form an LLP by registering as a Professional Limited Liability Partnership (PLLP). Also, a few states don’t offer the LLP business structure at all.
Businesses that operate as Limited Liability Partnerships will have “LLP” displayed at the end of their name. For example:
- Ortiz, Northrop, & Johnson, LLP
- Wilson and Partners Public Accountants, LLP
Similar to a Limited Liability Company (LLC), the LLP is a hybrid structure that combines the benefits of a partnership and corporation to give owners liability protection, management flexibility, and potential tax advantages. Entrepreneurs that have their sights set on operating in multiple states will benefit from doing some upfront research to know if their states of interest recognize the Limited Liability Partnership structure or if they will need to consider other entity options. Each state’s Secretary of State office can explain its rules for LLPs. It’s also helpful to consult an attorney, tax advisor, and accountant when determining if the LLP or another structure will offer your business the greatest advantages.
Limited Liability in an LLP
How much personal liability protection partners in an LLP receive varies from state to state. Generally, all partners are protected from the legal issues and debts of the business, except to the degree of their own negligence or malpractice (or the wrongdoing of people who work for them).
Some states limit personal liability to the degree that a corporation does, while some will hold partners personally liable for certain debts (such as money owed to lenders and creditors) of the partnership.
Advantages of the LLP Business Structure
- Limited Liability for All Partners – In an LLP, all partners have some degree of limited personal liability. A partner is not responsible for the negligence or malpractice of other partners and may be protected from other debts and obligations of the business. Each state has its own rules regarding how much liability protection partners receive.
- Pooled Resources – Many LLPs are formed by professionals with experience and their own existing base of clients. By sharing office space, equipment, employees, and other resources rather than taking on those expenses individually, partners can reduce costs.
- Easy to Form – Generally, states make it simple to create an LLP. The process involves filing a registration form with the Secretary of State office. Some states allow existing businesses operating as General Partnerships to convert to an LLP. In addition to formation paperwork, the LLP and its partners must obtain all necessary licenses, permits, and insurance, etc. to operate legally and ensure they comply with any other federal, state, county, or local requirements. To make sure that all partners in an LLP are on the same page regarding how the business should be run, how much of the business each partner owns, and what each partner’s responsibilities will be, it’s recommended to have an LLP partnership agreement.
- Strategic Growth Opportunities – LLP partners can scale their business by either bringing in new partners or hiring junior partners to work for their firm. Junior partners do not have ownership in the company but are licensed professionals who get paid a salary for the business they do for the firm. Junior partners expand an LLP’s capacity to serve more clients, and they enable partners to focus on managing and growing the company.
- Management Flexibility – All partners in an LLP have a voice in the management and operations of the company. A Limited Liability partnership may add new partners and let other partners leave the firm per the LLP partnership agreement.
- Minimal Corporate Compliance and Financial Oversight – The LLP structure is simple to form and has fewer compliance formalities than a corporation. Also, when partners change ownership percentages, securities laws don’t usually apply because LLP partners are considered general partners.
- Avoids Corporate Double Taxation – The LLP is a pass-through entity, meaning that profits and losses flow through to the partners’ individual income tax returns. As such, a Limited Liability Partnership avoids the double taxation that corporations experience.
Disadvantages of a Limited Liability Partnership
- Not Allowed Everywhere – Depending on the state where individuals want to form an LLP, they may not be able to do it. Not all states recognize the LLP structure. Even if a company can form an LLP in its home state, it could run into issues if it wants to expand to other states. An LLP in one state won’t be able to foreign qualify in states that don’t allow the LLP business structure. Instead, the business would need to form an entirely new entity in those states—which could mean getting treated as a general partnership (thus forfeiting the advantage of limited liability) or dealing with extensive of paperwork, extra cost, and additional ongoing compliance requirements if the partners wish to incorporate.
- Restricted Eligibility – There may be restrictions on who can form a Limited Liability Partnership. In some states, only certain types of licensed professionals may form an LLP.
- Heightened Tax Burden for LLP Partners – With pass-through taxation, LLP partners must, in addition to income tax, also pay self-employment tax on their profits from the business. For some individuals, this can become excessive.
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