Limited Liability Partnerships (LLPs): The Basics

Limited liability partnerships (LLPs) enable partners to realize economies of scale by working together and reducing their liability for each other’s actions.

Before getting too excited about any legal entity, make sure you check your nation’s (and state’s) laws. Get legal advice first. It is likely that they have firsthand experience with LLPs.

What is a Limited Liability Partnership (LLP)?

A general partnership is a good starting point for understanding an LLP. General partnerships are for-profit entities formed by mutual agreement between two or more parties. A partnership is a way for two or more people to make money together. It is possible for a general partnership to be quite informal. A handshake, a written contract (but not necessarily), and a shared interest are all it takes.

There is, however, a downside to the informal nature of a general partnership. In addition to legal liability, there is also the risk of financial loss. All partners share responsibility for any issues arising in a general partnership.

In the event that Joan and Ted are partners in a cupcake venture and a bad batch causes people to get sick, both of them can be sued for damages. As a result, many people quickly convert general partnerships into formal legal entities to protect their personal assets.

LLPs have different details depending on where they are created. Legal action against a partner’s personal assets is generally prohibited. You may lose assets in the partnership, but not those outside the partnership (your personal assets). In the event of a lawsuit, the partnership is the first target, although a specific partner can be held responsible if they personally contributed to the lawsuit.

Comparison of LLPs and LLCs

Limited liability companies (LLCs) and limited liability partnerships (LLPs) both offer owners protection. In most jurisdictions, LLPs require a written partnership agreement and annual reporting requirements.

The liability protections and management requirements differ from those of an LLC, however. Businesses managed by LLCs have more flexibility in who can manage them. LLPs require equal division of management responsibilities. LLCs protect members from personal liability for debts or claims against their businesses. In an LLP, one partner is not liable for the mistakes of another partner.

For certain types of professionals, an LLP is a superior option to an LLC or other corporate entity because of its flexibility. The LLP is a flow-through entity for tax purposes, just like an LLC. In this case, the partners receive untaxed profits and are responsible for paying the taxes. LLCs and LLPs are better than corporations, which are taxed as entities and their shareholders are taxed again on distributions.

A comparison of LLPs and LPs

All partners can participate in managing an LLP, just as they can in a general partnership. There is another type of partnership, known as a limited partnership (LP), in which one partner, the general partner (GP), holds all the power and most of the liability and the other partners remain silent, but have a financial stake. As a result of shared management, an LLP also shares liability, though that liability is greatly limited as its name implies.

An LLP has many benefits

Reputation is a key factor for professionals who use LLPs. It is common for LLPs to be formed and managed by a group of professionals who have a lot of experience and clients among them. By pooling resources, the partners lower business costs and increase the LLP’s potential for growth. Office space, employees, and so on can be shared. In addition, reducing costs allows the partners to realize a greater profit than they could individually.

There may be a number of junior partners in an LLP who work for the partners in hopes of becoming full partners one day. In most cases, these junior partners are paid a salary and have no stake or liability in the partnership. In essence, they are qualified professionals who handle the work that the partners bring in.

Partners can scale their operations in this way through LLPs. The partners are freed up to bring in new business because junior partners and employees take care of the detail work.

An LLP also has the advantage of being able to bring in partners and let them go. Partner additions and retirements are governed by the partnership agreement for an LLP. Since the LLP can always add partners who bring existing business with them, this comes in handy. It is usually necessary to get the approval of all existing partners before adding a new partner.

Global LLPs

There are LLPs in many countries that differ from the U.S. model in varying degrees. Professionals who take an active role in managing an LLP are usually taxed as a flow-through entity.

For LLPs, there is often a list of approved professions, such as lawyers, accountants, consultants, and architects. LLPs also vary in liability protection, but most countries’ LLPs provide individual partners with protection against the negligence of any other partner.

Questions and Answers

How Do You Define Limited Liability Partnerships (LLPs)?

As a partner of an LLP, you are limited in your liability for the partnership’s debts and claims. The partners of an LLP are not liable for one another’s actions.

A Limited Partnership vs. an LLP: What’s the Difference?

 

There must be at least one general partner in a limited partnership (LP), and limited partners can’t manage the partnership. All partners of an LLP are limited in their liability.

The differences between a sole proprietorship and an LLC

In contrast to sole proprietorships, LLCs have important differences. A key difference is whether you have limited liability for the business’ debts and obligations, as with an LLC, or whether the business’ debts and obligations fall to you personally if the business is sued.

LLCs offer distinct advantages in terms of liability protection and legal protection. Even though setting up an LLC has filing fees, they can be well worth it when compared to the thousands of dollars you could be liable for as a sole proprietor.

Sole proprietorships, on the other hand, do not require any capital. If you wish, you can also switch to an LLC or other formation option when you are ready. Additionally, if you want to dissolve your business, you can simply stop operations (and cancel any licenses and permits you may have).

Lastly, sole proprietorships are subject to very few regulatory requirements, but LLCs are subject to a variety of initial and ongoing fees and filings. By managing this yourself, you can miss important filings and incur penalties as a result.

What is the difference between an LLC and an incorporation?

Whether to form a corporation or a limited liability company depends on the type of business an individual is starting, the tax implications of forming the entity, and other factors. In addition to providing an additional layer of liability protection, both types of entities help to protect assets from creditors.

The creation and management of an LLC is generally much simpler and more flexible than that of a corporation. However, both types of business structures have advantages and disadvantages.

The formation of a limited liability company

In general, setting up an LLC takes a decent amount of time and knowledge with paperwork than setting up a corporation. Due to the fact that LLCs are governed by state law, the process of forming an LLC varies from state to state. Many states require articles of organization to be filed with the secretary of state, and some states allow them to be filled out online. There are some states that require an additional step of publishing a public notice, usually in the local newspaper. LLCs are officially formed after these steps are completed.

When an LLC is formed, it is a good business practice to outline the roles and responsibilities of the members. LLC members own shares of the company. Operating agreements define these roles in most LLCs. A valid LLC does not require an operating agreement, but it is prudent to draft one. LLCs governed by state statutes are governed by default if an operating agreement is not written.

The operating agreement specifies the rights and responsibilities of the members. A business contract defines the relationship between the parties, addresses capital structure issues, allocates profits and losses, provides for the buyout of a member, and provides for the death of a member, among other things.