A limited liability partnership, also commonly referred to as a “LLP,” is a type of business structure that allows individuals in the partnerships, known as partners, to be free from the debts and liabilities of all of the other partners. Additionally, partners are also shielded from certain debts and liabilities of the partnership itself.
One of the most attractive advantages of forming a partnership is that actions are brought against the partnership as a whole, instead of personally against a single partner. This means that in a limited liability partnership, no single partner is personally liable. Limited liability partnerships are thus different from general partnerships, as in a general partnership all partners are liable for the partnership’s debts and obligations.
However, a limited liability partnership is similar in some aspects to a general partnership. Specifically, in both a limited liability partnership and general partnership, all partners can actively participate in the management of the business. Further, all losses and profits from the business are passed through to the partners of the partnership in accordance with the governing partnership agreement.
Generally speaking, limited liability partnerships are typically reserved for professionals such as lawyers and accountants, so that the partners may avoid liability for the negligence or misconduct of the other partners. For instance, in states such as New York, California, Oregon, and Nevada, only individuals who are licensed to practice public accounting, law, or architecture, can structure their business as a limited liability partnership.
How Is a Limited Liability Partnership Created?
Similar to most other limited liability organizations, LLPs are created by statute. This means that each state will specify who can form an LLP, as well as the process for becoming an LLP. In fact, in some states any group of two or more people can form an LLP.
In general, most states require first filing for a certificate of formation with the Secretary of State to seek approval to form the partnership. Thus, it is important to consult your state’s Secretary of State’s website, as well as the laws regarding partnerships in your state, prior to attempting to form an LLP.
Although state laws may vary considerably in terms of how a limited liability partnership is formed, generally the following steps are necessary in order to form a limited liability partnership:
- File a Statement of Qualification: In order to form an LLP, you will first need to file a Statement of Qualification and pay a filing fee with the Secretary of State’s office.
- Name of Your Limited Partnership: Next you will need to name your LLP, and ensure that the name of the LLP has not been used before and is unique from other business entities or trademarks in your 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. Additionally, some states require that the name of the LLP include one of the following words:
- Registered limited liability partnership;
- Limited liability partnership;
- The abbreviation L.L.P.; or
- Either the designation “RLLP” or “LLP,” in either uppercase or lowercase letters.
- Statutory Agent: Next, the partnership must provide evidence of a statutory agent. Statutory agents are agents who represent the LLP in any matter, and accept legal papers on the behalf of the LLP;
- Obtain An EIN: Next, because LLPs are separate entities from its partners, you would need to obtain a federal Employer Identification Number (“EIN”) from the IRS;
- Publication Requirement: After being approved to form the LLP, a copy of the qualification and approval will be published in the LLPs principal place of business;
- Partnership Agreement: The next and most important step in the formation of an LLP, is to create a 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. Well drafted partnership agreements can help reduce the likelihood of future legal issues involving the LLP and its partners;
- Register with The Department of Revenue, And Obtain Business Licenses: Depending on the specific type of LLP that you are forming, you may need to register with the Department of Revenue (“DOR”) if you are selling goods and collecting taxes. Additionally, you will likely need to obtain a business license in the LLPs name in order to operate; and
- File Reports: Lastly, many states require LLPs to file annual financial reports concerning the LLP.
In terms of paperwork, in order to form a Limited Liability Partnership, one individual in the partnership must file a Statement of Qualification or application to form the LLP. Typically, the following information is required when submitting that initial formation document:
- The official name of the LLP;
- The name of the registered agent for the LLP;
- Address of the principal office of LLP;
- Address of the agents of the LLP; and
- The name and address of each partner of the LLP.
What Are the Advantages and Disadvantages of Forming an LLP?
As touched on briefly above, there are several benefits associated with forming a limited liability partnership, including but not limited to:
- Limited Liability: Limited partners are all protected from debts and obligations in a LLP. Additionally, every partner can exercise some degree of management control of the LLP;
- Tax Benefits: The profits and losses in a LLP flow directly through the LLP to the partners. Once again, this is typically controlled by the partnership agreement. The partners are then taxed on their personal income tax returns, and share the profits and losses. As such, they are not held to double taxation, like in a corporation; and
- Flexibility: Limited liability partnerships offer partners flexibility in terms of business ownership and involvement. Partners have the right and control to decide how they will contribute to business operation and management. Additionally, partners can divide the business duties based on the experience of each partner.
There are also many disadvantages with forming an LLP, including but not be limited to:
- Death of a Partner: LLPs are typically automatically dissolved upon the death of a partner in the LLP. This is true even if the other partners do not wish to dissolve the LLP and would rather continue business operations;
- Lack of Consultation or Unanimous Agreement: In an LLP structure, the partners do not need to consult with each other before making business decisions. This is why it is crucial to have a partnership agreement before the LLP is formed, as the agreement will state what each partner can and cannot do in the LLP; and/or
- No IPO: Unlike corporations, LLPs cannot go public and do an initial public offering to raise capital. This means that the funds necessary to run the business, and begin the business initially will have to be provided by the partners themselves.
What Else Should I Know About Limited Liability Partnerships?
As mentioned many times above, one of the major advantages of forming an LLP is that partners are shielding from the liability of the LLP. However, the limited liability partnership itself may sue individual partners, in its own capacity. Most commonly, partners are sued for breaching the partnership agreement, or otherwise causing financial harm to the partnership.
Likewise, an individual partner may also sue the partnership in order to enforce the partnership agreement. Individual partners may also sue the partnership in order to enforce their legal right to relevant information about the partnership, and their legal right to an equal share of the profits that are generated by the business.
Typically, a partner will sue an individual partner if their decisions caused them financial harm. However, if the individual partner acted with the authority of the partnership, the individual will instead likely sue the partnership.
Do I Need An Attorney To Form An LLP?
If you wish to form an LLP, it is in your best interest to consult with an experienced corporate lawyer who is familiar with the laws governing LLPs in your state. An attorney can help you determine whether the LLP structure best suits your needs, as well as assist you in drafting all of the required filing documents.
An attorney can also assist in drafting the governing partnership agreement. Additionally, should legal action ever become necessary, the attorney would also be able to represent the LLP or the individual partners in court, as needed.