Disadvantages of Limited Liability Partnership
According to the U.S. Small Business Administration, when two or more people agree to operate the same business, this is known as a partnership.3 min read
There are several disadvantages of limited liability partnership. According to the U.S. Small Business Administration, when two or more people agree to operate the same business, this is known as a partnership. The managerial responsibilities are shared among partners along with the profits and losses.
When partners want to protect themselves from the negligence of the other partners, they must form a limited liability partnership, also commonly referred to as an LLP. An LLP is often confused with a private limited company because it is very similar — both have a separate legal identity that is kept separate from the legal identities of the partners.
How to Form an LLP?
If you are wanting to start a business, there are many ways it can be formed. One of the more popular types is an LLP. In fact, LLPs have been extremely popular for more than 20 years, especially among licensed professionals.
When forming an LLP, there are several steps you will need to take. First, you will need to start by filing the proper paperwork. This typically involves completing an application to receive a certificate to be an LLP. You will also have to pay a filing fee.
What Types of Professionals Benefit from LLPs?
Common types of professionals that especially benefit from LLPs include:
LLPs also tend to be suitable when a business has individual earnings that are not added to a single account and then distributed according to dividends. When an LLP is formed, the earnings that are distributed to the members are deemed as personal income.
How Do LLPs Differ From Traditional Partnerships?
In most ways, an LLP will operate almost identically to a traditional partnership. However, one of the key differences lies in the fact that LLPs have to register with the Companies House. Traditional partnerships do not.
How Many Designated Members Does an LLP Have to Have?
To create an LLP, there must be at least two individuals who are assigned as designated members. The designated members will be responsible for carrying out a variety of administrative tasks, like handling payroll information and tending to tax matters. Although an LLP must have at least two designated members, there is no maximum number it can have in ordinary members.
Since the legal identity of an LLP is not directly tied to the legal identity of its members, legal claims cannot be made against the members. If a person wants to make a legal claim against a member, it has to be made directly toward the company.
Any liability that falls back onto the members is limited to the capital investment that they make into the LLP. This means their personal assets are not at risk of being seized if any of the partnership's debt has to be settled.
What Is an LLP Agreement?
The management of a partnership is outlined in an LLP agreement. It states which duties are to be managed by which specific partners. This agreement will also outline the rights of the members. More so, it gives an extensively detailed description as to how the partnership is to be run. The LLP agreement should be constructed before any of the company's stocks or shares are traded.
Disadvantages of a Limited Liability Partnership
One of the main disadvantages of an LLP is that they aren't allowed everywhere. The tax filings of this type of entity are extremely complex, which is why some states don't allow them to be formed. There's also the issue that some states don't recognize them as a legal entity. In some states, LLPs can with the fact created but not by certain professionals, like doctors. Just like some states don't allow them, some states enforce heavy tax limits on them. These taxes are often endured both when creating the LLPs and throughout their operations.
LLPs are often associated with having less credibility than other businesses. This is why many businesses choose to incorporate themselves as actual corporations rather than LLPs. Another major con of LLPs is that individual partners do not have to consult with one another when they are conducting certain activities. And lastly, as mentioned before, financial records must be submitted for public record.
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