Limited Liability Partnership: Everything You Need to Know
A limited liability partnership (LLP) is a legal construction that requires a written partnership agreement.3 min read
What Is a Limited Liability Partnership?
A limited liability partnership (LLP) is a legal structure that requires a written partnership agreement and often comes with annual reporting requirements depending upon your local jurisdiction. Like in a common partnership, all individuals identified in an LLP can take part in the administration of the partnership.
There are also other partnership structures, such as a restricted partnership, where one person has the power and many of the legal responsibilities. Meanwhile, other participants or investors are silent, but have a monetary stake. With the shared administration of an LLP, the legal responsibility may also be shared, but can be restricted.
LLPs and legal responsibilities vary from state to state. Some states impose a private legal responsibility that's much like an organization. Other states solely restrict private legal responsibility for the negligence of a partner. Some states restrict private legal responsibility for a partner’s negligence, in addition to partnership contracts and money owed. In other words, a partner is simply someone personally responsible for their own personal negligence. In an LLP partnership, there are two or more partners. The general partner can be either an individual or a corporation.
The legal costs of forming a limited partnership can be even higher than they are to form a corporation because in some states they are governed by securities laws. Each year, a limited partnership must file IRS Form 1065. This form indicates how an individual allocates their share of income or losses from the partnership. Tax regulations limit the amount of losses a limited partner can deduct on a personal tax return.
Why Designate as an LLP?
Most LLPs are created and managed by a group of parters with expertise in the area and a lot of clients between them. By pooling assets, participants lower the cost of being involved in the enterprise. The investment also allows an LLP to grow. Partners in an LLP can share office space, staff, and so on. Partners in an LLP may have additional staff in the agency who work for them with the hopes of at some point becoming partners.
In general, the flexibility of an LLP makes it a better choice compared to an LLC or different company entity. Like an LLC, the LLP itself is a flow-through entity for tax purposes. Partners obtain untaxed income and pay taxes individually, thus avoiding double taxation. Both an LLC and LLP are preferable to a company, which is taxed as an entity, after which its shareholders are again taxed once more on individual earnings. Tax strategy is an important consideration when deciding to go with an LLP.
How Limited Is Limited Liability?
Generally, your private property as a partner will be protected against any legal motion in an LLP. Generally, the liability is limited in the sense that you'll lose your investments in the partnership or business, but not your private property. The partnership is the primary goal for any lawsuit, although some partners may very well be personally liable for negligence.
Are There Advantages to a Limited Liability Partnership?
Since all members of an LLP are partners, different legal guidelines don't typically come into play among the individual partners, unless they are a silent partner.
What Are Disadvantages of a Limited Liability Partnership?
Limited liability partnerships (LLPs) are treated differently from state to state. For example, some states will acknowledge LLPs formed in another state, while some do not. A state that does not, will likely treat that entity as a normal partnership in terms of legal responsibilities and regulations. Interestingly, other state LLPs are often referred to as overseas LLPs.
How Are Limited Liability Partnerships Different?
Restricted partners don't have an active role in the day to day management of an enterprise. Restricted partners typically contribute financially to the enterprise, however, have minimal management over enterprise choices or operations. They usually can't bind the partnership to business proposals. Restricted partners, as a rule, shouldn't have to pay self-employment taxes. Their share of partnership revenue is just not thought of as "earned revenue" in terms of self-employment taxes.
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