Key Takeaways

  • An LLP (Limited Liability Partnership) protects individual partners’ assets from the misconduct or negligence of other partners.
  • Both individuals and entities, including corporations, can generally be partners in an LLP, depending on state law.
  • Corporations and S corporations are recognized as “persons” under the law, enabling them to participate in partnerships, though restrictions apply in some contexts.
  • There are different types of partnerships in business: general partnerships, limited partnerships, limited liability partnerships (LLPs), and limited liability limited partnerships (LLLPs). Each structure offers unique advantages and risks.
  • Partnerships can be tailored to professional groups (like law or medical practices), joint ventures, or investment purposes, depending on liability, taxation, and operational needs.
  • Choosing the right partnership type depends on factors such as liability tolerance, tax goals, and long-term business plans.

Can a company be a partner in an LLP is a question you may find yourself asking when deciding on which business entity to create. In the most basic form, a partnership is a business where two or more people work together to run a business. For professionals such as lawyers and doctors, it may be advisable to take the partnership a step further and form an LLP.

What is an LLP?

An LLP, or limited liability partnership, is a business that is both owned and operated by multiple people who share the responsibilities. Many professionals choose to form as an LLP because it provides personal protection for their assets against business debt and the actions of other partners. This is important to many professional fields where lawsuits can be common and costly. It is essential to note that each partner could be held liable for their own actions even if they are not for each other.

The Pros of An LLP

There are many pros that come with forming an LLP. Some of the benefits of an LLP include:

  • All partners have limited liability for their personal assets.
  • LLPs provide good motivation for employees as many works to become full partners.
  • You are required to file less paperwork than with a corporation or an LLC.

The Cons of an LLP

While there are many pros to forming an LLP, there are also cons to consider before choosing it as a business entity. Some of the cons of an LLP include:

  • Each state has its own regulations and requirements which can make it confusing how to form one depending on the state.
  • Since each partner is responsible for their own liability, the cost for their insurance policies can be extremely costly especially for some professions.

Different Types of Partnerships in Business

Beyond LLPs, businesses and professionals can choose from several types of partnerships, each with unique legal and financial implications:

  1. General Partnership (GP):
    • Formed when two or more individuals agree to run a business together.
    • Partners share profits, losses, and liabilities equally unless otherwise agreed.
    • Simple to establish but exposes partners’ personal assets to business debts.
  2. Limited Partnership (LP):
    • Includes at least one general partner with unlimited liability and one or more limited partners whose liability is restricted to their investment.
    • Limited partners typically act as investors and do not participate in day-to-day operations.
  3. Limited Liability Partnership (LLP):
    • Protects partners from liability for the actions of other partners.
    • Popular among professional service providers such as lawyers, accountants, and doctors.
  4. Limited Liability Limited Partnership (LLLP):
    • A newer form that offers liability protection to both general and limited partners.
    • Not available in all states but increasingly recognized for large or complex business structures.

Forming an LLP

There are multiple steps when it comes to forming an LLP that you will have to go through before receiving that designation. You will need to:

  • Decide where you want to register your company: The laws for forming an LLP can vary from state-to-state, so it is important to find out the state requirements from their Small Business Administration website to decide which formation laws will work best for your partnership.
  • Register in your desired state: Once you have chosen the state to form, you will need to register with that state agency and file for registration along with the necessary fee.
  • Obtain an EIN: For tax purpose, you will need to file for an employer identification number which can be obtained for free from the IRS website.
  • Create your partnership agreement: This agreement will detail the terms that you have agreed on for how your partnership will be run.

Who Can Be a Partner in an LLP?

The state statutes where the LLP is formed will dictate which types of individuals and entities can legally be included as partners in a limited liability partnership. In general, a partnership can form with two or more persons who agree to be co-owners of a business. Under this definition a "person" can refer to:

  • An individual.
  • A corporation.
  • A business trust.
  • A partnership.
  • An association.
  • A joint venture.
  • The government.
  • A subdivision of government.
  • An agency.
  • Or any other legal or commercial entity.

An S Corporation as a Person

An S corporation is basically a corporation that has elected a special s designation to pass the income through the shareholders and avoid double taxation. To qualify as an S corporation, there are restrictions on the number and type of shareholder. In fact, a partnership cannot be an owner in an S corporation though an S corporation is allowed to be considered a "person" entering into a partnership.

A Corporation as a Partner

A corporation has the ability to be a partner in a general partnership as they are not considered legal structures but more or less formal arrangements between two people doing business. A corporation is often considered a "person" in almost any situation. When a corporation becomes a general partner, they are then open to full liability under that arrangement but are shielded from personal liability as shareholders in a corporation.

Choosing the Right Partnership Structure

The decision between different types of partnerships in business depends on:

  • Risk Tolerance: Entrepreneurs willing to accept full personal liability may consider a general partnership, while those seeking protection should evaluate LLPs or LLLPs.
  • Tax Considerations: Partnerships avoid corporate double taxation since profits pass through to partners. However, tax treatment varies based on partner type and state laws.
  • Management Control: General partners exercise control, while limited partners and corporate partners often have more restricted roles.
  • Growth Goals: Professional firms may prefer LLPs for liability protection, while investment groups might choose LPs or LLLPs to attract outside investors with limited liability.

Careful analysis of these factors, and guidance from a legal professional, ensures the partnership type aligns with long-term business objectives.

Frequently Asked Questions

  1. What are the main types of partnerships in business?
    The primary types are general partnerships (GPs), limited partnerships (LPs), limited liability partnerships (LLPs), and limited liability limited partnerships (LLLPs).
  2. Can a company be a partner in an LLP?
    Yes. Most states allow corporations and other legal entities to be partners in an LLP, provided state statutes permit it.
  3. How does an LLP differ from an LP?
    In an LLP, all partners have liability protection from one another’s actions, whereas in an LP, only limited partners enjoy liability protection while general partners remain fully liable.
  4. What is the biggest disadvantage of a general partnership?
    The biggest drawback is that partners are personally liable for all business debts and obligations, which can put personal assets at risk.
  5. How do I decide which partnership type is best for my business?
    The choice depends on liability concerns, tax goals, management preferences, and long-term business strategy. Consulting with an attorney can help identify the best fit.

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