A limited liability partnership (LLP) is a partnership with limited liability status. Unlike general partnerships, individual partners are usually “shielded” from personal liability for the misconduct of other partners.
Limited liability partnerships are sometimes called registered limited liability partnerships (RLLP). LLPs are well-suited to professional groups, such as lawyers, accountants, doctors, and surgeons. In some states, LLPs are only available to professionals.
Professionals may prefer LLPs over general partnerships, corporations, or LLCs. Professionals don’t want to be personally liable for another partner’s problems or malpractice claims. An LLP protects each partner from debts against the partnership arising from professional malpractice lawsuits against another partner.
However, a partner who loses a malpractice suit doesn’t escape liability.) Forming a corporation to protect personal assets may be troublesome. Some states don’t allow licensed professionals to form an LLC.
Who Can Form a Limited Liability Partnership?
Typically, LLPs are reserved for professionals, such as lawyers and accountants, to avoid liability for negligence or misconduct of other partners. Since an LLP is a general partnership with limited liability status, it runs like a general partnership. It has the same flexibility of control with income, losses, and gains passing to the partners according to the partnership agreement or interests of the partners.
How Is a Limited Liability Partnership Created?
Like most limited liability organizations, the LLP was created by statute. Thus, each state’s statute will specify who can form an LLP and the process for becoming an LLP. Generally, most require a filing for a certificate with the Secretary of State.
What Type of Liability Protection Does A Limited Liability Partnership Offer?
A partner’s liability in an LLP is limited only regarding the negligence or misconduct of other partners. A partner is liable for all other debts and obligations of the partnership that do not stem from negligence or wrongdoing.
Are Limited Partnerships Different From Limited Liability Partnerships?
Limited and limited liability partnerships are businesses with more than one owner. Unlike general partnerships, limited partnerships and limited liability partnerships offer limited personal liability for business debts.
In limited partnerships, at least one of the owners is considered a “general” partner. A general partner makes business decisions and is personally liable for business debts. LPs have at least one “limited” partner who invests money in the business but has little control over daily business decisions and operations. The advantage for these limited partners is that they are not personally liable for business debts.
The limited liability partnership is a similar business structure, but it has no general partners. All owners of an LLP have limited personal liability for business debts.
Why Choose an LLP?
Professionals tend to use LLPs. Most LLPs are created and managed by professionals with experience and clients among them. By sharing resources, the partners lower the costs of doing business while increasing the LLP’s capacity for growth. Partners can share office space and employees. Reducing costs allows the partners to gain more profits than they could individually.
The partners in an LLP may have junior partners in the firm who work for them in the hopes of being full partners. Junior partners are paid a salary. Junior partners often have no stake or liability in the partnership. Junior partners are designated professionals who are qualified to do the work that the partners bring in.
Junior partners are one way that LLPs help the partners scale their business. Junior partners and employees do the detailed work and allow the partners to focus on bringing in new business.
LLPs can bring partners in and let partners out. Because a partnership agreement exists for an LLP, partners can be added or retired. LLPs can add partners who bring existing business with them. The decision to add new partners requires approval from all existing partners.
The flexibility of an LLP for certain professionals makes it a superior option to an LLC or other corporation. LLPs are flow-through entities for tax purposes. The partners receive untaxed profits and must pay the taxes themselves. LLPs are preferable to corporations, which are taxed as an entity and its shareholders taxed again on distributions.
Are LLPs a More Formal Partnership?
Some professions require more customization in their business structure. The LLP is a formal structure that requires a written partnership agreement and usually comes with annual reporting requirements.
Like general partnerships, all partners in an LLP can participate in the management of the partnership. In limited partnerships, one partner has all the power and most of the liability. The other partners are silent but have a financial stake. With the shared management of an LLP, the liability is also shared, but it is greatly limited.
What Does Limited Liability Mean?
The details of an LLP depend on where it was created. In general, personal assets as a partner are protected from legal action.
Liability is limited in the sense that a partner may lose assets in the partnership but not personal assets outside of it. The partnership is the first target for any lawsuit, although a specific partner could be held liable if they personally did something wrong.
Do LLPs Allow for Flexible Roles for Partners?
In an LLP, each partner has the right to manage the business entity and retain flexibility in shaping their role in business operations. LLP partners have the freedom to determine how the LLP will be managed. LLP partners can agree to delegate daily business operations to a managing partner or a committee made up of partners.
LLP partners may divide duties based on expertise, experience, or personal interest. Many LLPs develop an LLP agreement to outline each partner’s role in the business to avoid confusion.
Are LLPs Easy to Form?
State law controls the requirements for LLP formation. Usually, it is simple for eligible parties to create an LLP. LLP partners must complete a registration form and file it with the relevant state agency, such as the Secretary of State’s office.
State statutes may allow existing general partnerships to convert their partnership to an LLP. LLPs may create an LLP agreement to outline each partner’s roles and identify each partner’s financial contributions and profits and losses.
Limited Liability Company vs. Limited Liability Partnership
A limited liability company (LLC) and an LLP are almost identical. The primary is that an LLC has the same liability shield as a corporation. Members of an LLC may not be personally liable for the debts and obligations of the company.
Do I Need an Attorney?
The selection of the right business entity is vital to the success and organization of an organization. Hiring a corporate attorney familiar with LLPs will help you to analyze the pros and cons of choosing a particular business entity. If you decide an LLP is right for you, a lawyer can help you draft your state’s required filing documents.
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