A partnership is one of the most common types of business entities. In contrast to general partnerships, partners in limited liability partnerships (LLPs) are not held personally liable for the financial obligations of the business.
Professional service firms, for example, accounting firms and law firms, frequently form as LLPs. In addition to the partners being free from the debts and liabilities of the business, partners are also free from the debts and liabilities of the other partners.
One of the main advantages of forming partnerships is that actions are brought against the partnership as a whole instead of being brought personally against one partner. In other words, no single partner will be personally liable.
Although there are significant differences between general partnerships and LLPs, there are certain similarities. In both types of partnerships, all of the partners can actively participate in the management of the business.
In an LLP, all of the profits and losses from the business are passed through to the partners of the partnership in accordance with the partnership agreement. Generally, a limited liability partnership is usually reserved for professionals, for example, accountants and lawyers, so that the partners can avoid liability for the negligence or misconduct of the other partners.
There are some states which only permit certain types of professionals, such as public accountants, lawyers, and architects, to structure their businesses as LLPs, including:
- New York; and
The process of forming limited liability partnerships varies by state.
How is a Limited Liability Partnership Created?
A limited liability partnership is created by statute, similar to other limited liability organizations. This means that the state will specify which individuals are permitted to form LLPs as well as the process required to form the LLP.
In certain states, any group of two or more individuals are permitted to form an LLP. The majority of states require a potential LLP to first file for a certificate of formation with the Secretary of State to seek approval to form the partnership.
Although there may be considerable variation by state regarding how LLPs are formed, the following steps are a general outline of the steps required to form LLPs:
- File a Statement of Qualification: In order to form an LLP, an individual will first need to file a Statement of Qualification and pay a filing fee with the Secretary of State’s office;
- Name of the Limited Liability Partnership: Next an individual will need to name the LLP;
- It is important to ensure that the name of the LLP has not been used before and is unique from other business entities or trademarks in the state;
- Typically, the Office of the Secretary of State allows individuals to search for names of registered LLPs to ensure that the name is both unique and available for use;
- In some states, the name of the LLP is required to include one of the following words:
- Registered limited liability partnership;
- Limited liability partnership;
- The abbreviation L.L.P.; or
- The designation “RLLP” or “LLP,” in uppercase or lowercase letters;
- Statutory agent: The partnership must provide evidence of a statutory agent who represents the LLP in any matter and accepts legal papers on the behalf of the LLP;
- Obtain an EIN: Because LLPs are separate entities from its partners, the LLP will need to obtain a federal Employer Identification Number (“EIN”) from the IRS;
- Publication requirement: After the LLP formation is approved, a copy of the qualification and approval must be published in the LLPs principal place of business;
- Partnership agreement: Although some states do not require a partnership agreement in order to form an LLP, it is recommended to always draft one, as the partnership agreement will state what each partner can and cannot do when making business decisions;
- Register with the Department of Revenue and obtain a business license: Depending on the specific type of LLP that is being formed, an individual may need to register with the Department of Revenue (DOR) if they are selling goods and collecting taxes;
- It will likely be necessary to obtain a business license in the LLPs’ name in order to operate; and
- File reports: Many states require LLPs to file annual financial reports concerning the LLP.
What are the Requirements for a Limited Liability Partnership in Virginia?
In Virginia, any business is permitted to register as an LLP. The only requirement is that there are at least two partners.
In Virginia, a sole proprietor is not permitted to form an LLP. The Uniform Partnership Act governs the creation and management of LLPs in Virginia.
The State Corporation Commission handles the registration of limited liability partnerships. If an LLP operates under an assumed name, or any name other than the partners’ surnames, the business name must be registered with the state.
In addition, the business’ status as a limited liability partnership must be designated by placing LLP after the name. There must also be a registered agent designated for the LLP.
A registered agent is an individual who is authorized to accept important documents, such as paperwork initiating a lawsuit, for the business. If an individual needs assistance selecting a registered agent, a business lawyer can assist with that process.
What Paperwork do I Need to Form a Limited Liability Partnership?
In order to form a limited liability partnership, an individual is required to file a Statement of Registration with the State Corporation Commission. This form may be submitted either in person or by mail.
The following information must be provided on the Statement of Qualification:
- The name of the partnership;
- The SCC identification number, if previously assigned;
- The principal business address;
- The registered agent’s:
- Any other information the partners report;
- The manner in which the partners approved the registration; and
- The signatures of at least two authorized partners.
An individual may be required to submit additional paperwork if they plan on operating the business under an assumed name. In addition to the state filing requirements, members of an LLP in Virginia should consider drafting a partnership agreement.
The partnership agreement will outline the duties and responsibilities of the partners. For example, these agreements may outline the procedures for:
Having a written partnership agreement can assist in preventing extended litigation if a dispute occurs.
What Benefits Does Virginia Give to a Limited Liability Partnership?
Limited liability partnerships have specific benefits. LLPs are not required to pay income taxes.
Instead, the income passes through to the partners who are required to report the income to the IRS and pay taxes on that income. As previously noted, the partners may not be held personally liable for the debts of the LLP or the negligence or misconduct of the other partners.
In other words, a partner’s personal assets are not permitted to be used to collect the debts of the partnership unless the partner:
- Was negligent;
- Engaged in misconduct; or
- Personally guaranteed payment.
What Disadvantages Does Virginia Give to a Limited Liability Partnership?
Virginia does not protect the partners of an LLP from all business liabilities. As noted above, there are certain circumstances in which a partner may be held personally liable.
If an individual forms a limited liability partnership, they should seriously consider purchasing liability insurance to help offset any risks. If an individual is concerned about liability, they may also consider creating a limited liability company (LLC) or S corporation instead.
These types of business entities may offer additional protections to the business owners. There are, however, different rules and procedures which apply to corporations and LLCs in Virginia.
Should I Hire a Lawyer?
Although it may seem that completing paperwork is the only requirement for forming a limited liability partnership. However, there may be many more steps that go into the process.
If you are considering forming an LLP in Virginia, it may be helpful to consult with a Virginia corporate lawyer. Your lawyer can assist you with completing the LLP formation paperwork, drafting your partnership agreement, and evaluating liability insurance politics.