What is a Limited Liability Partnership (LLP) - Definition & Guide

March 26, 2024
Modified on:
March 23, 2024
Written by:
Swati Bucha
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What Is LLP

It stands for Limited Liability Partnership. An LLP is an alternate corporate business form that provides limited liability for a company and flexibility in a partnership. 

If you are aspiring and wish to open a business, you can choose LLP as your company's or startup's business structure. Entrepreneurs are increasingly choosing Limited Liability Partnership (LLP) as their preferred organizational structure as it combines the best of both worlds: a company and a partnership business. 

It allows business owners to reduce their liability for their company's responsibilities and financial choices as an alternative to general partnerships. Unlike other legal structures, like sole-proprietorship or partnership, it assures that no business owners have to sacrifice their assets, like a home or retirement savings, for the benefit of the business.  

Let's learn more about limited liability partnerships, their advantages and disadvantages, and their legal implications. 

Structure of an LLP 

A limited liability partnership offers small business owners something that a general partnership business structure doesn't. Before we delve into understanding the structure of an LLP, let's take a quick recap of what limited partnerships and general partnerships are. 

  1. General Partnership: A limited partnership business is not a separate entity, and the court may hold any general partners liable for the entire company's debt. The partner's assets may be used to settle the debt. 
  2. Limited Partnership: This business structure comprises at least one general partner and one limited partner. The limited partner provides capital help (whether financial, workforce, or material), and the general partner manages the business's day-to-day operations. The court may hold the general partner liable for the company's entire debt, and the limited partner is liable for the amount invested in the venture. 

Coming back to the structure of an LLP (Limited Liability Partnership), an LLP operates as a general partnership but without the personal liabilities associated with the business. The partners do not generally hold personal liability for debts that may occur due to myriad reasons. They are only responsible for the amount they have invested in the partnership. 

Key Features of LLP

A limited liability partnership business structure combines the essence of a corporate structure and a partnership firm structure; it is called a hybrid of a company and partnership. 

The maximum number of partners is unrestricted; however, upon incorporation, there must be at least two members, who may be individuals or limited companies. One person and a dormant business can also establish an LLP. The following are features that dictate what is a limited liability partnership:

  • It exists as a distinct legal entity. It can continue to exist irrespective of changes in partners. 
  • An LLP requires at least two people to form as partners, and no upper limit exists. 
  • An LLP can get into contracts and hold a property in its name. 
  • It is liable to the full extent of its assets, but partners' liability is limited to their agreed contribution. 
  • No partner is liable for the other partner's independent or unauthorized actions. Thus, this hybrid business structure shields the individual partners from joint liability caused by the other partner's wrongdoings. 
  • An agreement governs the mutual roles and duties between the partners in an LLP or between the partners and an LLP. 

Partnership Agreement 

Effective operation of an LLP depends on the existence of a partnership agreement, as decisions made by one partner may have consequences for the other partners. The agreement should clearly state what each partner can and cannot do when making business decisions.

A partnership agreement should include the following details: 

  • Partner roles and responsibilities,
  • Contributions, including money, labor, skills, and equipment; profit and loss distribution, 
  • Liabilities, including debts and other partners' contractual duties, 
  • Purchase and dissolution terms. 

The partnership agreement should be drafted after consulting with a qualified lawyer because it is legally binding.

Advantages of LLP

Let's look at the advantages of setting up a business in LLP business structure: 

1. Distinct Legal Entity

Similar to a company, an LLP is a distinct legal entity. The partners and the LLP are also distinct. An LLP may file and receive lawsuits under its name. Contracts are signed under the LLP's name, which helps the company win over the confidence of different parties and promotes trust in its suppliers and customers.

2. Limited Liability of Partners 

The partners' liability is limited to their respective contributions in a limited liability partnership. This implies that they are not personally responsible for any losses the company faces and are only obligated to pay the amount of their contributions. If the LLP goes bankrupt, only the LLP's assets are responsible for paying off its debts. The partners are free to conduct themselves as respectable businessmen because they are not personally liable.

3. Minimal Cost and Reduced Compliance 

Forming an LLP is less expensive than incorporating a public or private limited company. However, an LLP must also adhere to a few compliances, like LLPs need to file the Annual Return and the Statement of Accounts and Solvency annually.

4. Absence of a Minimum Capital Contribution Requirement

A minimum capital requirement is unnecessary to form an LLP, and a minimum paid-up capital is unnecessary to proceed with incorporation. Any capital contributed by the partners can form a limited liability partnership.

Disadvantages of LLPs

Like every other business structure, some concerns are also associated with LLPs. Let's look at them: 

  1. LLPs can be fined heavily if they default or delay filing the compliances. This can be an image wrecker for a small business and affect the company's finances and working capital. 
  2. This hybrid business structure is only recognized in some states, such as Alabama, Arkansas, and Georgia. However, Wyoming, Nevada, and Delaware are the three best states in which to establish an LLP. 
  3. In some instances, a partner can bind another partner. For example, a partner may supervise an email marketing campaign and make false customer promises. This is a clear deviation from marketing regulations in the US, and another partner may get entangled in this mess. 
  4. LLPs require extensive documentation; some companies may need help filing for compliance. Besides, it comes with more paperwork and expenses, requiring compliance with state and federal laws. 
  5. The LLP business structure is available only to certain types of businesses, such as architectural, law, and accounting firms. 

Steps to Form a Limited Liability Partnership

Several steps are involved in forming an LLP. While additional steps may be needed in some states, the below steps should be considered general guidelines for forming a limited liability partnership. 

1. Verify Eligibility 

The first step is to check whether your state allows the formation of an LLP. Some states limit the formation of LLPs to a certain profession. It is essential to check all the limitations before proceeding with the process. 

2. Select a Name for your Company.

Ensure that your company's name is distinctive and adheres to state laws governing business names. To find out if the name is available, you can contact your state's Secretary of State's office. On a federal level, you may also inquire with the United States Patent and Trademark Office (USPTO).

Also, if you consider naming your business something other than your name, you must register for a Doing Business As (DBA) name. Most states that allow the formation of an LLP will require the inclusion of an LLP or Limited Liability Partnership at the end of the business name. 

3. Craft a Partnership Agreement. 

The next step is to form a partnership agreement that defines the role and responsibilities of each partner, along with details of each partner's liability limitation and assets. 

4. Name a Registered Agent.

All business entities should maintain a registered agent in the state. The agent should be an individual or company authorized to conduct business in the state where you have applied for the formation of an LLP. The agent must have a physical address in the state. If your business is located physically in the state where you are applying for LLP formation, then your company may act as its agent. 

5. Register State Documents. 

The state where you conduct business will require you to prepare, file, and pay registration fees to form documents. Typically, this consists of a Certificate of Limited Liability Partnership and Articles of Organization. It is advisable to confirm the name of these documents with the state you are filing, as some states use slightly different names. Filing fees for a Certificate of Limited Liability Partnership may range from $50 to $100. 

Get Employer Identification Number

To submit the paperwork, confirm that you possess the necessary business and professional licenses. Businesses also need an Employer Identification Number (EIN) and business bank accounts. You can complete the IRS Form SS-4 or apply for an EIN online from the IRS's official website. 

Get a State ID

Furthermore, a state ID may be needed in some states for tax, workers' compensation, and malpractice insurance purposes.

Get Business Permits and Licenses 

When forming a business, you don't have to register with the county or city government, but you might need licenses or permits. Check with your local government in the areas where you operate, as regulations can differ significantly.

You might have to file in each state if you conduct business in more than one state. You must submit a Certificate of Authority to each state to accomplish this. Some states may require a Certificate of Good Standing from the state where you first filed.

Purchase Insurance 

Some states may require LLPs to purchase specific insurance plans, like workers’ compensation and malpractice liability insurance, to satisfy potential claims. Proof of adequate assets might be required to cover this insurance liability. You can contact your local secretary of state or the Department of Industrial Relations to locate insurance providers in your respective states. 

6. Maintain Compliance

LLPs must adhere to several important compliance requirements but have fewer reporting and compliance requirements than corporations. Differences between states may exist, but some examples of these requirements could be:

  • Filing and paying employment taxes,
  • Keeping an operating agreement or partnership in place at the main office,
  • Submitting yearly reports to the state renewing licenses and permits, convening formal annual partnership meetings, and taking minutes, 
  • Notifying the state about any major modifications to the enterprise. 

Legal and Tax Implications of LLPs 

Under IRS rules, the LLP avoids the double taxation associated with corporations. Each LLP partner must file their share of the LLP's profit or loss on their individual federal tax return. LLP partners, as independent professionals, pay their normal self-employment taxes. 

Under federal tax laws, an LLP is not taxed as a separate business entity. Certain tax statutes may not provide pass-through taxation and may impose a state franchise tax on the LLP entity. 

Wrapping up,

Many businesses prefer an LLP business structure to protect their assets in case things go south and if the venture fails or declares bankruptcy. Partners in an LLP are not personally liable and cannot be forced to pay the business debt with their assets or properties.

However, another option to consider is a Limited Liability Company (LLC). An LLC is a form of corporation with limited liability. Large LLCs are converted into corporations. This type of business structure features flexibility in structure, management, and tax formalities. 

It is best to choose an LLC if you are considering starting a tech-related business, as it offers a higher growth potential. If your business works, it will eventually become a corporation! However, an LLP is the best option if you are considering establishing a business related to consumer goods, consulting, or legal and do not require investments soon.


Frequently Asked Questions

1. What is a general partnership? 

A general partnership is a type of business arrangement in which two or more people consent to divide all the assets, earnings, debts, and liabilities of a company they own jointly.

2. Do partnerships with limited liability pay corporation tax?

Although an LLP is not taxable as an entity, its members are. Therefore, an LLP does not require a corporation tax return or corporation tax. Instead, the untaxed earnings are given to its members, who pay tax on the amount of their share. For tax purposes, the members must file a self-assessment tax return.

3. How do I pay myself as a partner in an LLP?

LLP partners do not receive salary or wages; instead, partners receive profit distributions. Every distribution is specified in the partnership agreement and is made directly from the company's profits. Partners usually receive a portion of the profits according to their contributions.

4. Who may establish an LLP?

In most states, any responsible adult may be an LLP partner. However, certain states limit membership to licensed professionals who provide services that require particular qualifications.

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