A partnership is a form of business that has more than one owner. A limited liability partnership (LLP) incorporates some elements of a corporation and some elements of a partnership. An LLP offers greater liability protection and management flexibility than other partnership formats and is easier to set up than a limited liability company. Here’s an overview of LLPs and why this structure is so common.
Limited liability is a key benefit of an LLP. If the LLP is sued, for instance, the potential loss to one of the partners will generally be limited to that partner’s investment in the LLP. A business or person with a claim against the LLP usually won’t be able to go after the individual partners’ personal assets. Also, the partners won’t be held liable for acts of another partner.
LLPs are also easy to set up compared to other liability-limiting entities such as corporations. And they are treated as pass-through entities by the IRS. That means profits aren’t taxed twice but only once, on the partners’ individual federal returns.
Compared to other partnerships, LLPs allow for a highly flexible management structure. The partners are free to design their roles in the operation almost any way they want. LLPs can add partners easily. And if a partner wishes to leave, it doesn’t require dissolving the business.
The LLP shield against liability isn’t absolute. Individual partners can be held personally liable for debts or obligations due to something they did on behalf of the LLP. If another partner does something negligent, that partner could be held individually liable while the other partners escape liability.
An LLP itself could become insolvent due to liabilities incurred by a partner’s actions. Some LLPs buy malpractice insurance to protect the partnership and other partners against losing their investments in the LLP due to the LLP’s failure.
LLPs are regulated by the states and while most states offer this business structure, not all do. Some states provide for LLPs but prohibit some professionals from forming them. For instance, in California, only lawyers and accountants may form LLPs.
Finally, an LLP requires at least two partners. If one of the partners decides to leave the firm, the partnership will be dissolved.
LLPs are popular among professionals. Partnerships among accountants, architects, attorneys, dentists, engineers, financial advisors, physicians, veterinarians and undertakers are often LLPs. Setting up an LLP lets partners shield themselves from malpractice or negligence claims against other professionals who practice as partners.
General partnerships are often created when two or more business partners want to equally share both the day-to-day management decisions as well as the liability. Each partner is responsible not only for the debts of the business but also for any actions taken by the other partner or partners on behalf of the business.
Limited partnerships have at least one general partner and at least one limited partner. The general partner handles day-to-day management and also shoulders liability for the business. The limited partners are “silent partners” who don’t get involved in daily management and are shielded from liability.
Limited liability companies or LLCs offer their members much better protection against liability than partners in LLPs or other partnerships. Only in the event of misconduct such as fraud are LLC members able to be held liable for business debts.
LLCs are, however, much more complicated to set up than partnerships. The paperwork and regulatory oversight is similar to that borne by corporations. And some states won’t allow members of some professions to set up as LLCs. They see benefits in having professional partners bear more liability than an LLC allows.
The Bottom Line
LLPs offer greater liability protection and management flexibility than other partnership formats. While they’re not as good as LLCs at shielding partners from liability, they are much easier to set up and are popular business formats for professionals.
Tips for Picking a Business Structure
- Choosing the most appropriate business structure can be complicated. A financial advisor can help you sort through your options. Finding the right financial advisor who fits your needs doesn’t have to be hard. SmartAsset’s free tool can match you with up to three local financial advisors, and you can choose the one who is best for you. If you’re ready, get started now.
- Picking partners for an LLP is critical, as is the division of duties each partner is responsible for. A managing partner may be in charge of most decision making, while other partners take on specific duties based on their interests or talents. It’s a good idea to have an LLP agreement that spells out each partner’s responsibilities.
Photo credit: ©iStock.com/Prostock-Studio, ©iStock.com/andrei_r, ©iStock.com/Deklofenak