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LEGAL DICTIONARY

Limited Liability Partnership (LLP)

What Is an LLP?

The acronym LLP stands for a limited liability partnership, a business structure that provides some liability protection and other advantages for its owners. Other business structures include:

Doctors, attorneys, accountants, and other professionals who are in practice together often use this form of partnership. The structure protects them to some degree from being involved in lawsuits that allege wrongful acts or negligence by other partners.

What Are the Benefits of a Limited Liability Partnership Advantages?

Why use an LLP? As its name implies, the main reason to use an LLP over, for example, a sole proprietorship is the reduced liability exposure it offers.

As in a general partnership, LLP partners can actively participate in the operation of their business. However, unlike a general partnership, LLP partners have some limited potential personal liability for the debts, negligence, or wrongdoing of other partners in their organization.

  1. The first advantage, as a result, is that the assets of LLP partners are protected, even though they may risk their capital contributions to the business for a partner's mistakes. However, LLP partners are liable for their individual mistakes, including failing to show reasonable care in their professional work and not properly supervising their agents or employees.
  2. The second benefit is that partners can share operating costs, such as insurance, investments, and legal and accounting fees. An LLP often must carry liability insurance and may be required to post a bond or other form of financial security to help protect the public from liability claims.
  3. The third benefit is that it functions as a pass-through entity, meaning the organization avoids a double layer of taxation. LLP partners file their share of the business profits or losses on their individual tax returns.
  4. An LLP offers flexibility in how the business is managed. The partners create a written agreement on how the LLP operates and profits are distributed. In other words, the partners themselves decide how the business runs and who runs it. The partners then take money from their business as shares, not salaries.

How Does an LLP Work?

Partners form an LLP by signing a partnership agreement and filing an LLC operating agreement and articles of incorporation with their Secretary of State's Office.

As with other partnerships, LLPs must file an IRS Form 1065 once a year, reporting individual partner shares of the partnership's income or losses on a Schedule K-1. Partners then report their income shares on their personal federal tax returns. The states vary on whether they allow this "pass-through" taxation on state returns.

Since LLP owners are partners, not employees, they must pay self-employment taxes.

LLP Vs. Limited Partnerships

The liability protection that an LLP offers makes it distinctive from a limited partnership. In an LLP, all partners are protected to some degree from liability for the wrongful acts or negligence of the other partners. A limited partnership only limits liability for some partners.

In a limited partnership, at least one owner must be on the record as a limited partner with limited liability. This limited partner cannot have major decision-making power or significant investments in the business.

State laws can vary regarding LLPs. For example, a few states allow LLPs for only certain professions. Also, some states do not recognize LLPs formed in another state. These states may view a so-called "foreign" LLP as a general partnership, thereby affecting liability issues for the partners.

Helpful Resources:
Investopedia - Limited Liability Partnership (LLP): The Basics
US News - What Is a Limited Liability Partnership?
The Balance SB - Limited Liability Partnership What Is It?
Entrepreneur Small Business Encyclopedia - Limited Liability Partnership

What Is an LLP?

The acronym LLP stands for a limited liability partnership, a business structure that provides some liability protection and other advantages for its owners. Other business structures include:

Doctors, attorneys, accountants, and other professionals who are in practice together often use this form of partnership. The structure protects them to some degree from being involved in lawsuits that allege wrongful acts or negligence by other partners.

What Are the Benefits of a Limited Liability Partnership Advantages?

Why use an LLP? As its name implies, the main reason to use an LLP over, for example, a sole proprietorship is the reduced liability exposure it offers.

As in a general partnership, LLP partners can actively participate in the operation of their business. However, unlike a general partnership, LLP partners have some limited potential personal liability for the debts, negligence, or wrongdoing of other partners in their organization.

  1. The first advantage, as a result, is that the assets of LLP partners are protected, even though they may risk their capital contributions to the business for a partner's mistakes. However, LLP partners are liable for their individual mistakes, including failing to show reasonable care in their professional work and not properly supervising their agents or employees.
  2. The second benefit is that partners can share operating costs, such as insurance, investments, and legal and accounting fees. An LLP often must carry liability insurance and may be required to post a bond or other form of financial security to help protect the public from liability claims.
  3. The third benefit is that it functions as a pass-through entity, meaning the organization avoids a double layer of taxation. LLP partners file their share of the business profits or losses on their individual tax returns.
  4. An LLP offers flexibility in how the business is managed. The partners create a written agreement on how the LLP operates and profits are distributed. In other words, the partners themselves decide how the business runs and who runs it. The partners then take money from their business as shares, not salaries.

How Does an LLP Work?

Partners form an LLP by signing a partnership agreement and filing an LLC operating agreement and articles of incorporation with their Secretary of State's Office.

As with other partnerships, LLPs must file an IRS Form 1065 once a year, reporting individual partner shares of the partnership's income or losses on a Schedule K-1. Partners then report their income shares on their personal federal tax returns. The states vary on whether they allow this "pass-through" taxation on state returns.

Since LLP owners are partners, not employees, they must pay self-employment taxes.

LLP Vs. Limited Partnerships

The liability protection that an LLP offers makes it distinctive from a limited partnership. In an LLP, all partners are protected to some degree from liability for the wrongful acts or negligence of the other partners. A limited partnership only limits liability for some partners.

In a limited partnership, at least one owner must be on the record as a limited partner with limited liability. This limited partner cannot have major decision-making power or significant investments in the business.

State laws can vary regarding LLPs. For example, a few states allow LLPs for only certain professions. Also, some states do not recognize LLPs formed in another state. These states may view a so-called "foreign" LLP as a general partnership, thereby affecting liability issues for the partners.

Helpful Resources:
Investopedia - Limited Liability Partnership (LLP): The Basics
US News - What Is a Limited Liability Partnership?
The Balance SB - Limited Liability Partnership What Is It?
Entrepreneur Small Business Encyclopedia - Limited Liability Partnership