For over 20 years, limited liability partnerships (LLPs) have been a popular business form for licensed professionals. LLPs are business entities created by state law. Limited liability partnerships provide owners with limited liability. This means that the partners would not be liable for anything other than their investment in their business. Many enter into LLPs if they want to protect their personal property in case they were sued.
One big advantage to a limited liability partnership is that the partners are not personally liable and cannot be forced to pay a business debt or liability with personal property or assets. Their personal assets would be shielded from all business liability.
Below are some reasons why LLPs are popular formation choices:
The biggest benefits of forming an LLP are the limited legal liability and the flexible management roles. Unlike general partnerships, an LLP does not expose its partners to unlimited legal liability. In other words, if someone sues the LLP, the partners will not be indefinitely liable for that amount. Their liability will be limited to the amount that they contributed to the LLP for its formation. However, this limited legal liability shield will be broken if the lawsuit stems from an intentional act of the partner.
An LLP has extremely flexible management roles for the partners. The roles are defined in the LLP agreement that the partners draft themselves. Under the structure, each partner has the right to manage the LLP and have the right to choose how much management that they want. Thus, partners can have a very active role or even act as a silent in the LLP.
State laws provide a clear structured process for forming LLPs. Thus, they are relatively easy to form. Generally, it requires the partners to fill out a registration form and file it with the local secretary of state. Nonetheless, the registration may require the partners to put in writing their roles, responsibilities, financial contributions, and debts distributions.
Another big benefit of LLPs is that it has pass-through tax such that it avoids double taxation. LLP partners will only pay their own personal income taxes, while the LLP will not be taxed as a business entity.
Creating a limited liability partnership is done through the state. Each state has its own set of rules and regulations that one must follow to form an LLP. The most common steps in forming a limited liability partnership are:
- Filing papers with the state for your LLP (usually a certificate of limited liability partnership)
- Paying a fee
Since LLP formations do have legal consequences and require partners to define their roles, it is best to have a corporate lawyer draft these agreements. Any mistakes in the registration process will delay formation process, or worse, subject the partners to unlimited personal liability.