Limited Liability Partnerships (LLPs) are business arrangements which allow each individual partner to be free from the debts and liabilities of any of the other partners. In addition, the partners are free from certain debts and liabilities of the partnership itself.
For more than 20 years, LLPs have been a popular business type for licensed professionals. A limited liability partnership is a business entity which is created by state laws.
The partners in an LLP are not liable for anything other than their investments in the business. Many individuals enter into LLPs when they want to protect their personal property in the event that they are sued.
One of the major advantages of LLPs is that the partners are not personally liable and they cannot be forced to pay business debts or liabilities with their personal property or assets. The partners’ personal assets are shielded from business liability.
When an action is brought against the partnership as a whole, no single partner will be personally liable. This sets LLPs apart from general partnerships, in which all partners are liable for the debts and obligations of the partnership.
LLPs are similar to general partnerships in that all of the partners can actively participate in the management of the LLP. In addition, the losses and gains of the business are passed through to the partners according to the partnership agreement.
There are some states which have rules regarding what individuals are permitted to structure their businesses as LLPs. For example, only individuals licensed to practice law, architecture, or public accounting can structure their businesses as LLPs in the following states:
- California;
- New York;
- Oregon; and
- Nevada.
Can Anyone Form a Limited Liability Partnership?
Limited liability partnerships are typically reserved for professionals, including lawyers and accountants, allowing those partners to avoid liability for any negligence or misconduct of other partners. Because LLPs are general partnerships with limited liability status, they run like a general partnership. They have the same flexibility of control related to income, loss, and gain passing to the partners pursuant to the partnership agreement or interests of the partners.
What Type of Liability Protection Does a Limited Liability Partnership Offer?
Limited liability partnerships offer certain protections. The liability of partners is limited in relation to the negligence or misconduct of the other partners. It is important to note that partners are liable for other debts and obligations of the partnership which do not result from negligence or misconduct.
What Are the Advantages of a Limited Liability Partnership?
As previously noted, limited liability partnerships provide several advantages, including:
- The partners have limited legal liability;
- The partners have flexible roles;
- They are easy to form; and
- Pass-through taxes.
One of the biggest advantages of an LLP is the limited legal liability as well as the flexible management roles partners can play. In contrast to a general partnership, an LLP does not expose the partners to unlimited legal liability.
In other words, if the LLP is sued, the partners will not be liable for an indefinite amount. Instead, their liability is limited to the amount which they contributed to the LLP for its formation.
The limited legal liability shield, however, will not be available if the lawsuit stems from intentional actions of one of the partners. Limited liability partnerships also have very flexible management roles for partners.
Partner’s roles are defined in the LLP agreement which the partners themselves draft. With an LLP, each partner has the right to manage the LLP as well as the right to choose how involved they want to be in the management of the business.
Because of this, partners may have extremely active roles or may even act as a silent partner in the LLP. The laws of the specific state will provide a clear, structured process for forming LLPs. Because of this, they are relatively easy to form.
In general, to form an LLP, the partners are required to fill out a registration form and to file that form with the local secretary of state. It is important to note that registration may require the partners to put in writing in their agreement provisions regarding:
- Roles;
- Responsibilities;
- Financial contributions; and
- Debt distributions.
Another major benefit of an LLP is that they have pass-through tax advantages so double taxation can be avoided. The partners in the LLP only pay their own personal income taxes and the LLP will not be taxed as a business entity.
How Can I Create a Limited Liability Partnership?
Partners creating a limited liability partnership will create the partnership through the state in which their business will be located. Every state has its own set of rules and regulations which the partners must follow when forming their LLP.
The most common steps involved in forming a limited liability partnership include filing the papers with the state the LLP will be operating in, typically a certificate of limited liability partnership and paying a fee, which may vary by state.
What is the Difference Between a Limited Liability Company and a Limited Liability Partnership?
Limited liability companies (LLCs) and LLPs are essentially the same type of business structure. The primary difference between the two is that the LLC has the same liability shield as a corporation, and, therefore, members of the LLC may not be personally liable for the debts and obligations of the business.
Who is Liable for Acts of Negligence in an LLP?
Although the partners in a limited liability partnership are not liable for the other partners’ negligent actions or misconduct, they are personally liable for their own negligent conduct. Partners are only shielded from individual liability when the wrongful conduct was committed by the partnership itself, which is a separate legal entity from the partners, or by the other partners.
Can an LLP Sue its Individual Partners?
Limited liability partnerships may sue, in their own capacity, the individual partners. This may include lawsuits for breaching the partnership agreement or causing harm to the partnership.
Individual partners are also permitted to sue the partnership in order to enforce:
- The partnership agreement;
- Their right to relevant information about the partnership; or
- Their rights to an equal share of the profits which are generated by the partnership.
Can One Partner in an LLP Sue Another Partner?
Yes, it may be possible for one partner in an LLP to sue another partner of the LLP. Regarding lawsuits between the partners, there are no special rules when one partner is suing another partner for conduct which is not related to the partnership, such as if one partner hits another partner with their vehicle.
If, however, one partner acted with the authority of the partnership against another partner personally, the partner who is injured will likely sue the partnership.
Should I Consult an Attorney?
It is essential to have the assistance of a corporate attorney for any issues, questions, or concerns you may have related to forming a limited liability partnership. It is important to have an attorney’s help when forming an LLP because the formation does have legal consequences and requires the partners to define their roles.
Any mistakes the partners may make during the registration process may delay the formation process, or, worse, subject the partners to unlimited personal liability. Having the assistance of a business attorney can ensure that your LLP is property formed according to your state laws and that your partnership agreement is legally enforceable and properly defines the roles and responsibilities of the partners.
