A Limited Liability Partnership (LLP) is a type of business structure which provides limited liability to the partners, or members as well as the same structural and tax flexibility of a partnership.
An LLP is a business structure which is commonly chosen by licensed professionals. LLPs are business entities which are created by the laws of the state where the business is located.
The partners of an LLP will not be held liable for anything other than their investment in the business. It is common for individuals to create LLPs when they want to protect their personal property if they are sued.
A major advantage of an LLP is that the partners are not personally liable; they will not be required to pay any business debts or liabilities with their personal assets or property. In other words, the personal assets of the partners are shielded from business liability.
If a lawsuit is filed against the partnership itself, no single partner will be held personally liable. This makes an LLP different from a general partnership where all partners are liable for the obligations and debts of the partnership.
There are some similarities between LLPs and general partnerships. In both, the partners may actively participate in the management of the business. Additionally, the gains and losses of the business are passed through to the partners pursuant to the partnership agreement.
What Are the Advantages of a Limited Liability Partnership?
There are several advantages of limited liability partnerships, including:
- The partners have limited legal liability;
- The partners have flexible roles;
- They are easy to form; and
- Pass-through taxes.
One of the major advantages of LLPs is the limited legal liability. Unlike general partnerships, LLPs do not expose the partners to unlimited legal liability.
If a lawsuit is filed against an LLP, the partners will not be held liable for an indefinite amount of money. Their liability, instead, is limited to the amount that they contributed to the formation of the LLP.
It is important to note, however, that this liability shield does not apply if a lawsuit is filed based on the intentional actions of a partner. An LLP also has very flexible management roles for its partners.
The roles of the partners of an LLP are defined by the partnership agreement which the partners create. Each partner in an LLP has the right to manage the LLP as well as the right to choose how involved they desire to be in its management.
Because of this, certain partners may have very active roles and some may even act as a silent partner in the LLP. LLPS are relatively easy to form because the laws of the state will provide clear instructions regarding how to form the LLP.
Generally, LLPs are formed when the partners fill out a registration form and file it with the secretary of state. Registering the business may require the partners to put certain elements in writing, including:
- Roles;
- Responsibilities;
- Financial contributions; and
- Debt distributions.
The pass-through tax advantage is another positive of an LLP. This avoids double taxation.
The partners in the LLP pay only their own personal income taxes. The LLP is not taxed as a business entity.
What are the Requirements for an LLP?
As previously noted, an LLP can only be formed pursuant to state laws. As a result, the requirements and protections provided for an LLP may vary widely by state.
Although there is a lot of flexibility when the partners are creating and structuring an LLP in Michigan, there are some mandatory requirements, including:
- Choosing a name for the LLP. This name must be different from all other business names on record with the Michigan Bureau of Commercial Services. It is required to include either “Limited Liability Partnership,” “L.L.P.,” or end with “LLP;”
- Choosing a registered agent. Michigan does not require an LLP to have a registered agent unless it is registering as a foreign entity;
- Certificate of co-partnership. To create an LLP in Michigan, it must first be formed as a co-partnership. This requires filing a Certificate of Co-partnership with the local county clerk. The forms which are required can often be found on the county clerk website, for example, the Wayne County Clerk website;
- Filing registration with LARA’s bureau of commercial services. After a business is registered as a co-partnership, it can then be converted to an LLP by filing with the LARA Bureau of Commercial Services. Blank applications are on LARA’s website. This application requires:
- the name of the LLP;
- the address of the principal office;
- the general nature of the business; and
- the information about the registered agent, if required;
- Creating an optional partnership agreement. Michigan does not require partnership agreements but they are always good idea to resolve issues including:
- partner contributions;
- distribution of profits;
- partners’ authority; and
- other elements; and
- Annual reports. Michigan does not require an LLP to file an annual report.
What Paperwork Do I Need to Form an LLP?
As noted above, the forms for co-partnership may be found at the local county clerk’s office. The application to convert co-partnerships to LLPs are found on LARA’s website.
The co-partnership forms can be filed with the local county clerk. The LLP application can be filed with the Bureau of Commercial Services, either by mail or by email.
What Benefits Does Michigan Give to a LLP?
Michigan provides several benefits for LLPs in the state. Reasons why individuals in Michigan may want to structure their businesses as LLPs include:
- Limited liability: Similar to a corporation, an LLP shields the personal assets of its limited partners from the debts and legal liability of the company;
- Pass-through tax entity: LLPs are taxed as pass-through entities and, therefore, avoid the double tax that is associated with corporations. The LLP itself is not taxed. Instead, partners are taxed according to their individual tax bracket when they receive their share of the LLPs profits;
- Survivability: Unlike general partnerships, LLPs do not have to be reformed every time a partner dies;
- Late filing: An existing general partnership can convert to a limited partnership at any time if it fulfills the requirements listed above; and
- General partner liability: Unlike limited partnerships, LLPs do not require the presence of a general partner who is liable for the actions and debts of the partnership.
What Disadvantages Does Michigan Give to a LLP?
Although the limited liability and the ability to avoid the double taxation which is associated with corporations may be appealing, there are some disadvantages to structuring a business as an LLP in Michigan.
If an individual is considering structuring their Michigan business as an LLP, they should be aware that unlike general partnerships or sole proprietorships, LLPs require filing formation forms and payment of some administrative fees. These can cost upwards of $100 for initial filings and may require hiring a lawyer.
Should I Hire a Lawyer?
It is essential to have the assistance of a Michigan corporate lawyer for any issues, questions, or concerns you may have relating to your Michigan limited liability partnership. Your lawyer can advise you of the laws of Michigan and how they will apply to your business.
Your lawyer can assist you with completing the application forms and ensuring that your LLP is created according to Michigan laws. Your lawyer can also help draft a partnership agreement for your business.
If you have already created an LLP in Michigan, your lawyer can review your business and ensure it complies with applicable laws. Your lawyer can also assist you with creating a partnership agreement for your business to ensure there are instructions for receiving profits, how to handle disputes, and other aspects of your business.
