In the United States, a partnership is an agreement between 2+ people or entities which is used to own and operate a business. Within a partnership, each person or entity shares managerial duties over the company. They will also share the profits or losses that are generated by the organization.
In 1992, only two states permitted the formation of an LLP. When LLP statutes were added to the Uniform Partnership Act in 1996, more than 40 states were permitting this business structure. One of the ways to structure this type of business is through a limited liability partnership, or an LLP. With an LLP, there are added protections provided for individual partners which alleviates the risks which are associated with 100% liability exposure.
It is important to distinguish the LLP structure in the United States from the limited partnerships (LTD) which are available in some countries. In a limited partnership, one unlimited partner may be required, with others being allowed to assume a role of investor or passive partner.
An LLP is not the same as an LLLP, which combines the benefits of a limited partnership with a limited liability arrangement. The standard LLP is intended to be a long-term business.
There are certain advantages and disadvantages to consider when evaluating whether or not this business structure is right for your needs.
List of the Advantages of a Limited Liability Partnership
1. The structure of an LLP shields partners from misconduct.
The limited liability partnership provides an advantage over the general partnership structure in that it offers a layer of liability protection. In a general partnership, all partners are responsible for the conduct of one another. In an instance of misconduct, all partners would be liable. Under the LLP structure, the conduct of the offending partner is applied to that person only. That means the negligence of one person is not applied to everyone else.
2. LLPs offer a unique tax advantage for partners.
When an LLP is formed, the individual partners receive the same tax benefits as if they were a standard partnership. That means they must file their personal income taxes and pay estimated taxes on their income. Any credits or deductions generated by the LLP are passed through to the partners, who are permitted to put them on their own tax return. When there are partners who have a limited stake in the company or have specific tax requirements to meet, this structure can provide advantages as the actual partnership itself does not pay taxes.
3. Partners receive a lot of flexibility with an LLP.
An LLP is run in a similar way to a limited liability company. The partners involved must come up with an operational agreement to determine how each person will contribute to the operations of the business. Management duties can be separated equally or unequally, based on the experiences each partner brings to the table. Partners can elect to have zero authority over business decisions, yet still maintain ownership rights with their equity in the business.
4. It can be formed in multiple states to extend the reach of the business.
From a structural standpoint, the LLP is very similar to the LLC. For most partnerships, it makes the most sense to register their business in the state where they plan to operate. If the state does not permit the limited liability partnership, however, it is possible to file in a different state. You would then be able to operate as an LLP in that state. Although this does cause multiple filing requirements, it also gives you the opportunity to extend the reach of the company if business is good. In Washington State, the online filing fee for an LLP is $200, with a guaranteed 2 business day processing on the application for out-of-state partnerships.
5. LLPs may not have tax responsibilities, but they have a legal position.
Partners might be responsible for reporting profits from an LLP on their own tax returns. That doesn’t stop the LLP from having the rights of a legal entity. Under the structure of a limited liability partnership, you are permitted to purchase, lease, rent, or own property to conduct business. You are permitted to employ staff when you have received your tax documentation. The company can enter into contracts. It can also be held accountable to its actions when necessary, which is where the limited liability benefit comes into play.
6. It may be permitted to appoint corporations as individuals in the LLP.
Within the structure of an LLP, corporate ownership is permitted in some areas. That means two companies could be appointment as members of the LLP. In other business structures, you may be required to have at least one partner or member be a person instead of a company. This design, when permitted, provides the limited liability partnership with added flexibility as it can take on the elements of a joint venture more than an actual startup.
7. Different levels of membership are permitted within a limited liability partnership.
Under the structure of an LLP, the partners are able to have designate and non-designate members. That allows the company to operate with different levels of membership. By default, all members might initially be permitted an equal share of equity. With an agreement governing the partnership, different equity percentages may be permitted. You can even allow members to have a financial stake in the limited liability partnership without taking on a management role and still earn profits from the business.
8. LLPs are permitted to choose their own business name.
Like any other business, you’re permitted to choose the name of your company when forming an LLP. The only stipulation is that the business must be available to use. It can incorporate the names of all partners involved. It can be a freestanding name, if so desired. It can also be a descriptive name of the services which are being provided by the partners. This can be an advantage if you have a common name and wish to pursue branding opportunities. By registering your LLP, you’d be able to prevent another company or partnership from registering with the same name as yours.
9. Pricing for a limited liability partnership is very competitive.
The cost of organizing a limited liability partnership is similar to the cost of organizing an LLC for the first time. Using the State of Nevada as an example, it would cost $75 to file the initial registration for the LLP. You would then have an initial list fee of $150, along with a business license fee of $200. You would have annual filing fees required to maintain the status of your business each year as well. That makes an LLP more expensive than a general partnership, but cheaper than a corporation.
List of the Disadvantages of a Limited Liability Partnership
1. There may be limitations on who is permitted to form an LLP.
In theory, a limited liability partnership can be formed by any business in any industry where the structure of the business is a partnership. In practical application, it is a business structure that is primarily used by accountants, architects, and attorneys who are working with partners. In Nevada, Oregon, New York, and California, an LLP is only permitted if the business involves practicing a licensed profession.
2. LLP structures do not protect against employee negligence.
There is a distinction made within the structure of an LLP about who is responsible for negligence. Employees of an LLP are an exception to this rule, so all partners would be responsible for the negligence of someone working for the company. Partner fraud is usually excluded from the liability protections in the limited liability partnership as well. If a partner witnesses criminal conduct and does not report it, they can lose their LLP status as well.
3. An LLP may not always be recognized as a partnership.
The taxing authorities in certain states throughout the U.S. treat an LLP as a non-partnership. That eliminates the benefits which are present from a taxation standpoint. In this situation, they would be treated as a standard business, with no pass-through opportunities. That is why it is important to see if this structure is available in your state before pursuing it. Then you must look at what your tax responsibilities will be under the limited liability partnership structure to determine if it will work for you.
4. There is no obligation for partners to consult with each other.
What makes a limited liability partnership strong is the initial agreement which governs the structure of the business. In an LLP, there is no obligation for the partners or stakeholders to consult with each other when going into a new business agreement. Each partner has the authority to negotiate on behalf of the company when entering a contract. Only a partnership agreement can restrict this authority. Consider having an agreement which offers a specific outline to dictate what partners are permitted to do and what they are not allowed to do.
5. Some LLPs may be required to make a public disclosure.
Depending upon the rules governing the LLP, it may be a requirement for the company to offer a public disclosure of finances. In the United Kingdom, this is the primary disadvantage found in forming a limited liability partnership. Your financial accounts would need to be submitted to become part of the public record. This would create an income declaration for all members that would be available to everyone, which is information that some members may not wish to be publicly known.
6. You cannot retain profits in an LLP.
Because the limited liability partnership is designed as a pass-through company, the business itself cannot retain profits to be reinvested into the business. The only way to carry over profits is for the partners to take the income, report it on their taxes, and then reinvest the amount back into the company for the next financial year. There is no flexibility in this structure at all. All partners receive their equity share of the earned profits each year.
7. LLPs are not permitted to be a single-member entity.
Unlike an LLC, the limited liability partnership requires a minimum of two people to be formed. If one person decides to leave the partnership, leaving only one partner remaining, then the LLP would likely need to be dissolved. This disadvantage would apply if the partner dies unexpectedly, is forced to file bankruptcy, or decides to leave the company altogether. Some exceptions may apply for partnerships which have 3+ members and one decides to leave the company.
If your work involves a professional specialty which provides specific services to your community, then the advantages and disadvantages of a limited liability partnership are important to consider. Although it is not available in every state, it may be the best structure to consider if you have decided that a partnership is the best option for you. Otherwise, if liability issues are a concern, an LLC may be another option to consider over a general partnership.