This article continues our review of the prominent business structures, namely Business Partnerships. Today we address the question, what is a Limited Liability Partnership.
A Limited Liability Partnership is a separate legal entity from its owners. It is governed by its partnership agreement. Each partner enjoys limited liability protection from the professional malpractice of another partner.
There are four main types of partnerships:
- General partnership
- Limited partnership
- Limited liability partnership (discussed in detail below)
- Limited Liability Limited Partnership
That is a concise definition of a limited liability partnership. Below I’ll go into greater detail on what is an LLP.
What is a Limited Liability Partnership
A limited liability partnership (LLP) is a separate legal business structure whereby two or more people agree to do business together. All partners are accountable for the day to day management of the company according to their partnership agreement.
Note: I am a small business owner who writes on business-related topics. Such topics often include legal elements. The information here is not legal advice. Utilize the topics here in preparation for your discussion with your legal counsel.
Who can form a Limited Liability Partnership
LLPs are commonly used by professionals including accountants, attorneys, and doctors. Such professionals agree to practice together. Some professionals are limited in the types of business structures they operate under. In many states accountants, attorneys, and doctors cannot utilize standard LLCs, traditional Corporations. LLPs, PLLPs, PLLCs, and PCs are then required.
How to Form a Limited Liability Partnership
A limited liability partnership is formed by submitting a registration for a limited liability partnership. You do this in the state the partners will do business. This is often completed online with your state’s Secretary of State.
The limited liability partnership registration established the company with your state. However, it is VERY important to formalize your agreement between the partners. This is accomplished within a partnership agreement
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LLP Partnership Agreement
An LLP partnership agreement documents the power, rights, liabilities, duties, and other important obligations of and between the partners. It typically includes:
- A description of the business
- Establishing contributions of each partner
- Profit and loss distribution
- Management and voting
- The term of the partnership
- Dissolution of the partnership
The partnership agreement and registration for limited liability partnerships are very important documents. Although you can create these yourself, I highly recommend that you seek legal counsel in drawing up these documents. If you are intent on creating these documents yourself, I suggest utilizing a respected online file creation firm such as LegalZoom.
How much does it cost to establish an LLP
The cost of establishing an LLP includes:
- Registering your LLP with you Secretary of State. The cost varies by state. In North Carolina is $125
- Drawing up your partnership agreement. I recommend consulting an attorney in creating this document. However, there are online file creation firms such as LegalZoom to help with this.
- Licenses and permits
You will also want to consider the cost of insurance!
Is an LLP a Separate Entity
It is a separate legal entity from the partners. It can enter into contracts, and own or lease property.
Ownership of LLP
Limited liability partnerships are owned by its partners. Ownership percentages are documented in their partnership agreement.
There is only one class of partners in an LLP. If you read an article mentioning designated partners, you are likely reading descriptions of LLPs in the United Kingdom.
Limited Liability Partnership Tax
LLPs are taxed as partnerships. Therefore they enjoy pass-through taxation. The company documents its profits and losses for administrative purposes. As agreed in the partnership agreement, profits and losses are distributed to the partners. The partners are taxed on their distribution of income from the partnership business.
Limited Liability Partnership Tax Rate
Limited liability partnerships are pass-through tax entities. Partners receive their distribution of profits and losses in accordance with their partnership agreement. Each partner’s distribution is taxed at the individual partners’ level.
You may find the latest individual income tax rates here.
How frequently is an LLP taxed
Limited liability partners are taxed annually with their individual income tax filings.
How are Limited Liability Partners Compensated
Partners are compensated as articulated in their partnership agreement. By default, partners are owners and receive a distribution of the companies profits and losses.
Who is Liable in a Partnership
The partners have unlimited personal liability for the general obligations of the limited liability partnership; however, each partner’s liability for the professional malpractice of another partner is limited to his or her capital contribution. – NCSOS
Investment Opportunities
An LLP only has one level of partnership. There isn’t a designation for general partners vs silent partners. Therefore an LLP isn’t a great business structure for raising capital via investment.
Does an LLP Perpetually Exist
An LLP usually terminates upon the death or withdrawal of a partner. Unlike a corporation, an LLP does not exist separately from its owners. The partnership agreement articulates the actions permissible when a partner leaves the partnership.
Requirements for the Ongoing Existence
Like all state-sanctioned business structures, an LLP must file annual reports with its Secretary of State. Failure to do so jeopardizes its legal status.
Advantages & disadvantages
A limited liability partnership has several advantages and disadvantages to be aware of. First, we’ll review some of the advantages.
Advantages of a Limited Liability Partnership
- Limited liability partnerships are legal entities. They can buy, rent, lease, own property, employ staff, and enter into contracts.
- Limited liability protection: Individual partners enjoy limited personal liability protection from the negligent acts of other partners in the LLP.
- Pass-through taxation: An LLP is a pass-through tax entity. Partners receive their distributions according to their partnership agreement. The profits and losses are taxed at each partner’s individual tax filings.
Disadvantages of a Limited Liability Partnership
- Limited liability partnerships are recognized in every jurisdiction.
- Business decisions by one partner are binding on the entire partnership.
Conclusion
We’ve addressed the question, what is a limited liability partnership. As you can see, its application fills a need for certain professionals where the standard LLCs and traditional corporations are not permitted.
Note: This article is written based on the definitions established here in the United States of America. Similar business structures exist worldwide. Definitions are different and nuanced based on the jurisdiction in which you reside.
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Sources:
- North Carolina Secretary of State: Choose a Business Structure Partnerships
- IRS: Partnership