Key Takeaways

  • LLPs (Limited Liability Partnerships) provide key advantages over traditional partnerships, including limited liability, separate legal personality, and property ownership rights.
  • LLPs offer tax flexibility and fewer compliance obligations compared to corporations, while still protecting partners’ personal assets.
  • LLPs are well-suited for professionals such as lawyers, accountants, and consultants who want the flexibility of partnerships with liability protection.
  • Traditional partnerships may be quicker to form and dissolve, but they expose partners to unlimited liability.
  • Despite benefits, LLPs may face challenges like limited access to venture capital, more complex registration, and stricter penalties for non-compliance.

What are the advantages of LLP over partnership? Major advantages of LLP over partnership include separate legal entity, limited liability of partners, and the ability to purchase property in its own name.

LLP or limited liability partnerships and general or traditional partnerships, both require a minimum of two individuals for their formation. Usually, LLP and general partnerships are quite similar except for the liability protection benefit offered by LLPs.

Features of LLP

  • Formation: Every LLP must have a registered office. You must register an LLP with the appropriate state authority by preparing and filing a formation document signed by at least two partners.
  • Designated Partners: You must appoint at least two individuals as designated partners.
  • Name of LLP: Every LLP must include the words “limited liability partnership” or “LLP” as part of its name.
  • Books of Accounts: Every LLP must prepare and file annual accounts in the prescribed form.

Advantages of LLP Over Traditional Partnership

An LLP combines the advantages of a corporation with those of a traditional partnership:

  • Separate Legal Entity: Legally, an LLP is a separate entity from its partners. It can own assets, enter into contracts, and can be sued in its own name. Moreover, one partner cannot be held responsible for the act or omission of another partner.
  • Limited Liability: The liability of partners in an LLP is limited to the extent of the amount contributed by them. Personal assets of partners cannot be used to pay off the business debts except in some exceptional circumstances like commission of fraud by a partner.
  • No Limit on Number of Partners: Any LLP can have any number of partners it wishes to have. LLPs are usually owned and managed by partners unlike corporations where directors are appointed to manage the company.
  • Ability to Purchase Property: Since an LLP is a separate entity from its owners, it can purchase and own property in its own name unlike in case of a traditional partnership, where property must be purchased in the name of individual partners.
  • Flexible Agreement: The partners of an LLP can draft the partnership agreement based on their mutual understanding and requirements. The agreement should define the rights and duties of the partners.

Tax and Compliance Benefits of LLP

Another important advantage of LLPs over traditional partnerships is their treatment under tax and compliance frameworks. In many jurisdictions, LLPs are considered "pass-through" entities, meaning profits are taxed in the hands of individual partners, avoiding double taxation that can occur with corporations. At the same time, LLPs must meet fewer compliance requirements than corporations, such as simplified filing obligations and less stringent reporting rules. Compared to partnerships, however, LLPs provide the added benefit of legally required accounting and registration, which enhances business credibility with clients, vendors, and financial institutions.

Advantages of LLP Over Corporations

  • Easier to Operate: It's much cheaper and easier to operate an LLP than a full-fledged corporation. There are fewer compliances to meet. One major requirement in most of the states is to file an annual report with the Secretary of State.
  • Easier to Wind-up: Just like its formation, an LLP is also much easier to wind-up. You can wind up an LLP in a matter of months, whereas closing down a corporation can take over a year.

Suitability for Professional Services Firms

One of the main advantages of LLPs over partnerships and corporations is their popularity among professional service providers. Industries like law, accounting, architecture, and consulting often prefer LLPs because they allow professionals to combine resources while protecting themselves from personal liability for a colleague’s negligence or misconduct. This makes LLPs especially attractive for businesses where individual partners may take on separate clients or projects. Unlike corporations, LLPs also avoid rigid hierarchical structures, letting professionals retain autonomy while enjoying the benefits of collective branding and liability protection.

Disadvantages of LLP

  • Difficulty in VC Funding: In order to contribute to the capital of an LLP, you must be a partner, and being a partner entails certain duties and responsibilities towards the business. Due to this reason, most of the venture capitalists won't be willing to invest in an LLP.
  • Rights of Partners: In an LLP, partners can have disproportionate voting rights instead of one vote per share. This can make some partners feel compromised if the business decisions of other partners affect their interests.
  • Greater Penalties: Even though the compliances required for an LLP are minimal, failure to comply with the requirements those can result in heavy penalties.

Disadvantages of LLP Compared to Traditional Partnerships

  • Formation: Traditional partnerships are quicker and easier to form, especially when you don't need to register them. Forming an LLP, however, takes little longer due to the legal procedure and formalities involved.
  • Termination: Just like formation, traditional partnerships can also be terminated easily. However, for closing down an LLP, you need to follow a certain legal procedure which may take a few months.
  • Registration: It's not mandatory to register a traditional partnership. However, you must register an LLP although you can do it online.
  • Suitability: Traditional partnerships are ideal for very small businesses where you are looking to test the waters. If you are convinced about a business idea and want to pursue it seriously at a larger scale, it's safer to form an LLP.

Both types of partnerships, whether an LLP or a traditional partnership, require a minimum of two partners. Both of them have certain limitations when compared to a corporation. Still, having an LLP is safer than a traditional partnership when it comes to interacting with outsiders like investors and vendors.

When a Traditional Partnership May Be Preferable

While LLPs provide significant protections, there are cases where a traditional partnership may be the more practical choice. For very small businesses or startups testing an idea, the simplicity of a traditional partnership can be appealing. These businesses avoid registration costs, annual compliance requirements, and mandatory public filings that LLPs must undertake. Traditional partnerships can also be easier for friends or family members who want to run a business informally without significant paperwork. However, partners should weigh this simplicity against the risk of unlimited liability before making a choice.

Frequently Asked Questions

  1. What are the main advantages of LLP over partnership?
    LLPs provide limited liability, a separate legal entity, tax flexibility, and the ability to own property in the business’s name, unlike partnerships.
  2. Who should choose an LLP instead of a partnership?
    LLPs are ideal for professionals (lawyers, accountants, consultants) or growing businesses that want liability protection while retaining flexibility.
  3. Is an LLP easier to form than a partnership?
    No. Partnerships are generally quicker and cheaper to set up. Forming an LLP requires registration and ongoing compliance.
  4. Can an LLP raise outside investment like a corporation?
    Not easily. Most investors prefer corporations, making LLPs less attractive for venture capital funding.
  5. When is a traditional partnership a better choice than an LLP?
    Traditional partnerships may be better for very small or family-run businesses looking for minimal paperwork and no formal registration requirements.

If you need help identifying what advantages of llp over partnership, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.