This post contains affiliate links, and we will be compensated if you buy after clicking on our links.
Read our review guidelines.
There are many different business structures and forms an enterprise can take.
Simply put, a Limited Liability Partnership (LLP) is an organization in which each partner’s liability is limited to the amount they have invested into the business.
In this article, we’ll cover:
- The basics of LLPs
- How they work
- How to form them,
- Whether or not an LLP is the right business structure for you.
Let’s get into it!
- A Limited Liability Partnership is an organization in which each partner’s liability is limited to the amount they have invested into the business.
- LLPs are partnerships, so the partners own the business and make decisions about the business.
- LLPs can hire and fire employees.
- LLPs require paperwork to be filed with your state.
- Partners receive untaxed profits and pay taxes on their own returns.
What is a Limited Liability Partnership (LLP)?
An LLP is a separate legal entity in which the owners are partners. Being a partnership, there needs to be at least two partners. However, it is possible to have more.
An LLP is separate from its partners, and as such provides limited liability protection.
The key distinction is that liability is only limited to the amount that each partner has put into the business.
That means that the individual partners are not able to be pursued by the business’s creditors should anything go awry – one of the most significant features of an LLP.
LLPs are favored by professionals such as lawyers and dentists because they allow the partners to retain control over their practice while leveraging their combined commercial appeal and expertise.
LLPs have no shareholders. Instead, the partners are the lead decision-makers.
Since LLPs require only limited registration forms to establish, they are a popular choice for professionals looking to set up shop together.
Often, businesses run by professionals or specialists are LLPs. This is because while each of the partners is able to run a business on their own, they benefit from working together to spread their name and reach in the market.
For example, dentists or lawyers might run a limited liability partnership so that they retain the profits of their business and maintain control over their hours, locations, and direction.
Having a practice in which each of the partners is an equal owner doesn’t prevent them from having employees.
However, it does allow each lawyer (for instance) who could run a personal practice to have equal ownership over a joint practice.
Because profits and losses are shared between partners, it is similar to running a sole proprietorship with the added benefit of having other professional partners who are also bringing in revenue and helping with the day-to-day operations.
Partners in an LLP receive untaxed business profits and then pay the taxes on their personal tax returns.
Pros and Cons
LLPs provide several benefits to business owners, which makes them an appealing choice to professionals in every industry.
Here are some of the most common pros and cons of an LLP:
Pooled resources and reputation help lift all members
Bringing new partners in or retiring old partners is as simple as changing the partnership agreement
Shared facilities mean each partner is spending less of their revenue as a percentage of costs and can realize greater profits
LLPs only have access to the capital of the partners as there are no shareholders
Managers of the business may incur greater liability if they are “designated members”
LLPs are only really suitable for certain types of professions and so are naturally limited
How to Form an LLP
LLPs are formed along a standardized framework. As such, there are key steps you need to take to form an LLP:
- Decide where to register: Different states will have varying guidelines and requirements for registering an LLP, so you need to know the differences when you register. As a professional, you will likely register where you already have a strong reputation. In this situation, be sure you know the state guidelines for registering an LLP.
- Register within your chosen state: You will need to follow your state’s guidelines for registering an LLP. Each state can be different, so be sure to investigate those requirements carefully.
- Obtain an Employer Identification Number (EIN): This involves a specific partnership EIN for opening a business bank account.
- Create a partnership agreement: This is the agreement by which the partners own and operate the business, and it lays out their obligations and privileges.
- Get the proper licenses and permits for your partnership: These involve the necessary professional accreditations and licenses required to practice as a dentist or a lawyer.
- Publish a notice in the local newspaper: An LLP must be announced publicly. Often, this is achieved by taking out an ad in the local newspaper for the town in which your LLP will be practicing.
To help speed this process up, you may want to look into engaging a quick start business formation service like LegalZoom!
Congratulations on reaching the end of this article!
Now that we’ve covered the ins and outs of LLPs, you may want to read further to iron out the more intricate details.
Or, jump straight in and engage an LLP formation service that can guide you through the process and clarify any further questions you may have.
Understanding if an LLP is right for you will help you make the right choice of business structure for your enterprise.
There are other business structures that might suit you better, such as an LLC or sole proprietorship.
However, an LLP can be the best choice to leverage your reputation and skills particularly when it comes to accredited professionals.
Is a limited liability partnership a good idea?
This depends entirely on you, your potential partners, your needs, and the business you are looking to set up.
An LLP can be great for some businesses and unsuitable for others.
How are taxes handled through an LLP?
Partners in an LLP receive untaxed business profits. They then pay taxes on those profits as part of their personal income.
How does a limited liability partnership work?
The partners in an LLP are each joint owners of the business and their liability is limited up to the amount they have put into that business.
Partners make joint decisions on the direction of their business and can hire employees to work for them.