A limited liability partnership (“LLP”) is a specific type of business management structure. Specifically, a limited liability partnership is a partnership that provides its partners limited liability status. Unlike general partnerships, individual partners in a limited liability partnership are usually shielded from personal liability for the misconduct of the partnership itself, as well as the other partners.
Limited liability partnerships are also sometimes called registered limited liability partnerships (“RLLP”). Limited liability partnerships are well-suited to professional groups, such as lawyers, accountants, doctors, pharmacists, engineers, and surgeons. In fact, in some states, LLPs are only available to professionals.
Professionals often prefer LLPs over general partnerships and corporations, because they don’t want to be personally liable for another partner’s negligent actions or malpractice claims.
Who Can Form a Limited Liability Partnership?
As far as who can form a limited liability partnership, that will be dependent on the laws in the state in which the LLP is being sought to be formed. In general, LLPs are reserved for licensed professionals, such as:
- Doctors;
- Lawyers;
- Dentists;
- Accountants;
- Therapists, psychiatrists, or psychologists; and
- Design professionals, such as engineers or architects.
How Is a Limited Liability Partnership Created?
The exact requirements for creating a limited liability partnership will once again depend on the laws of the state in which the limited liability partnership is being created. In general, business partners seeking to form a limited liability partnership will need to file a Certificate of Formation with the Secretary of State’s office in their state, which may include the following:
- Name of the LLP: The name of the LLP must typically include an applicable Limited Liability Partnership ending.
- Acceptable endings include LLP, L.L.P, RLLP and Ltd. Liability Partnership.
- Importantly, the name must not also currently be in used by another business or partnership;
- Registered Agent Information: The applicants will also need to provide information regarding the Registered Office and Registered Agent’s street address, mailing address, if different from the street address, of the LLP’s registered office and the name of the LLP’s initial registered agent are required;
- Principal Office: The physical and mailing address for the principal office will also need to be provided in the Application;
- Fiscal Year End Date: The month and date of the LLP’s fiscal year end;
- Optional E-Mail Address: The Secretary of State’s Office may allow for electronic correspondence concerning the LLP, in such a case an e-mail would be required;
- Effective Date: The Application will generally be effective on the date and at the time of filing, unless a delayed date or an effective time is otherwise specified in the Application or an accompanying partnership agreement;
- Execution: The document must also typically be signed by at least one of the LLP’s “general” partners named in the Application. In some cases, all partners must sign the Application; and
- Filing Fee: Finally, the accompanying filing fee required by the department that processes the application must be paid.
In addition to all of above necessary information, partners may also need to:
- Get an EIN: An employment identification number (“EIN”) is a unique number assigned by the Internal Revenue Service (“IRS”) to businesses. Because an LLP is a separate entity than its partners, partners would need to obtain a federal Employer Identification Number from the IRS;
- Register with Department of Revenue & Get Business Licenses: Depending on the specific type of partnership that is being created, partners may need to register with the Department of Revenue (“DOR”).
- For example, if the partnership is selling goods and collecting taxes, registering and obtaining a business license is necessary; and
- File an Annual Report: In some states, partners are required to file an annual report in order to keep the LLP alive.
What Are the Advantages and Disadvantages of Forming an LLP?
There are numerous advantages regarding forming an LLP. One of the main advantages for forming LLPs is that they provide owners with limited liability. Once again, this means the partners are not typically liable for anything other than their own investment in the partnership. As such, many business owners choose LLPs if they wish to protect their personal property.
Another considerable benefit of LLPs is that many states recognize pass-through taxation. The pass-through tax helps partners avoid double taxation. This means that LLP partners will only pay their own personal income taxes, while the LLP will not be taxed as a business entity.
LLP’s also have considerably flexible management roles for the partners, which are commonly defined in the LLP agreement that the partners draft themselves. Under a LLP arrangement structure, each partner has the right to manage the LLP, as well as the right to choose how much management they personally want. As such, partners can be active in their role or act as silent partners in the LLP.
There are also disadvantages to choosing to form an LLP. It is also important to note state laws generally do not protect limited liability partners from all business liabilities. This means a limited partner may still be held personally liable if they:
- Engage in misconduct;
- Are negligent themselves; and/or
- Personally guarantee a debt.
Additionally, in many states, when one of the partners to the LLP dies, the limited liability partnership will automatically end. This is true even if the other partners wish for it to continue. Finally, unlike corporations, LLPs cannot get money from the public through an initial public offering (“IPO”) . An IPO is the first non-private sale of securities by an issuer, or a person who is controlling the issuer, to members of the public.
Are Limited Partnerships Different From Limited Liability Partnerships?
Limited partnerships and limited liability partnerships are both business management structures that have more than one owner. Limited partnerships must contain at least one general partner, who is to oversee and manage the company, as well as at least one limited partner.
Similar to general partnerships, the general partners that are involved in a limited partnership can be held both jointly and individually liable for all company debts and/or risks. In contrast, a LLP may have no general partners. This means that all the partners in an LLP will all have limited personal liability for business debts.
Why Choose an LLP?
As mentioned above, there are numerous advantages for choosing to form an LLP. In addition to the above listed advantages, by sharing resources with one another, limited partners lower the costs of doing business while increasing the LLP’s capacity for growth.
For instance, limited partners can share office space and support staff. Reducing costs allows the partners to gain more profits than they could if they chose to work individually. Further, the limited partners in an LLP may also have junior partners in the firm who work for them in the hopes of being full partners.
Junior partners are one way that LLPs help the named partners scale their business. Junior partners and employees do the detailed work and allow the partners to focus on bringing in new business. Further, the limited named partners will still be shielded from the liability of the partnership itself.
Are LLPs a More Formal Partnership?
In short, yes, the LLP is a formal business management structure that often requires a written partnership agreement and annual reporting requirements. Then, if a partner in the LLP breaches the written partnership agreement, the limited liability partnership may sue its individual partners in its own capacity.
For example, if a partner breaches the partnership agreement, or causes harm to the partnership, that individual can be sued for breaching the agreement. Additionally, an individual partner may in turn sue the partnership in order to enforce the partnership agreement, or to enforce their right to relevant information about the partnership.
What Does Limited Liability Mean?
Once again, personal assets as a limited liability partner are protected from legal action. This means that limited liability refers to a partner only being able to lose assets in the partnership, but not their personal assets outside of it. The partnership will be the first target for any lawsuit. Although, a specific partner could be held liable if they personally did something wrong.
Are LLPs Easy to Form?
As mentioned above, state law will control the requirements for LLP formation. Usually, it is simple for eligible parties to create an LLP, as long as they follow the procedures outlined by the Secretary of State’s office. Further, some state statutes allow existing general partnerships to convert their partnership to an LLP.
Limited Liability Company vs. Limited Liability Partnership
A limited liability company (“LLC”) and an LLP are almost identical. For instance, an LLC has the same liability shield, but as a corporation. Members of an LLC are similarly not personally liable for the debts and obligations of the company. However, LLCs are subject to stricter laws regarding formation and management. This is especially true when interacting with investors.
Do I Need An Attorney To Form An LLP?
If you wish to form a limited liability partnership, it may be in your best interests to consult an experienced corporate attorney. An experienced corporate lawyer can advise you regarding the specific laws in your state regarding LLPs.
Further, an experienced corporate lawyer can also explain your rights and obligations in the limited liability partnership and assist you with completing and filing the required forms. An attorney can also help you draft a unique partnership agreement that best serves the interests of your business.
Finally, should any legal issues arise regarding the partnership’s liability or your own personal liability within the partnership, an attorney can also represent you in court, as needed.
