What Is a Limited Liability Partnership (LLP)?

Since the 1990s, a limited liability partnership (LLP) has become a popular form of business organization for many licensed professionals, such as:

• lawyers
• doctors
• architects
• dentists, and
• accountants.

An LLP is an alternative partnership structure to general partnerships (GPs) and limited partnerships (LPs). Many states have created laws recognizing an LLP as a legal business structure. Texas became the first state to adopt a law permitting the creation of LLPs and about forty states now formally recognize LLPs.

What Is an LLP?

An LLP is a business formed between two or more partners. The partners can be individuals or other entities. Though LLPs are usually formed by a group of individual professionals. Common examples of LLPs include:

• private general and specialty doctors' offices
• dentist offices
• law firms, and
• financial and accounting firms.

Some states allow only licensed professionals (like doctors and accountants) to form an LLP. Other states allow any group, regardless of their occupation, to form an LLP. So, you'll need to check your state laws to determine if you're eligible to form an LLP.

LLP vs. LLC. An LLP is often compared to a limited liability company (LLC) because the business structures share similar features. Both business types have limited liability for owners, flexible management structures, and pass-through taxation. But they also have notable differences such as their governing documents and the extent of owners' limited liability. (For more comparisons, read about LLCs vs. LLPs.)

LLP vs. GP and LP. When compared to other partnership structures, LLPs can be seen as a blend of GPs and LPs. LLP partners have limited liability—just as limited partners have in an LP. But an LLP also allows each partner to participate in the business's daily operations and decision-making—like a general partnership. (For more information, read about how the different partnership types compare.)

Should You Form an LLP?

With all of the different types of business organizations to choose from, you might wonder why you would choose an LLP over other forms of business entities. Before deciding whether an LLP is the right choice for your business, you should consider its benefits and drawbacks.

What Are the Advantages of an LLP?

If you're eligible to form an LLP, you and your partners can take advantage of many of its benefits.

Potential Limited Liability Protection

One main benefit of creating an LLP is a balance of management control with reduced liability exposure. Similar to a general partnership, an LLP allows its partners to actively participate in the operation of their business.

However, unlike general partners, partners in an LLP have limited liability. Typically, LLP partners only risk the money they invested into the business (their capital contributions) and don't face unlimited personal liability for another partner's mistakes. However, LLP partners are usually still liable for their own:

• debts
• negligence, and
• wrongdoing.

If an LLP partner doesn't use reasonable care in their professional activities or doesn't properly supervise their employees, then they could be personally liable for any injuries and costs that their negligence caused. So, the negligent partner would need to use their own funds to pay for these costs.

For example, suppose Barney and Fred are dentists and partners in an LLP. When treating one of his patients, Fred doesn't review the patient's records and mistakenly pulls out their four front teeth. The patient sues for negligence and the court awards the patient $50,000. Fred—not Barney—would be personally responsible for paying the $50,000 judgment.

Because each partner enjoys limited liability, some states require LLPs or the partners to carry minimum amounts of liability insurance. Your state's laws also might require you to post a bond or other form of financial security to help protect the general public from possible liability claims.

Allows Flexible Management Roles for Partners

In an LLP, each partner has the right to manage the business and has flexibility in shaping their role in business operations. LLP partners have a great deal of freedom in determining how the partnership will be managed.

The partners can agree to delegate daily business operations to a managing partner or to a committee made up of partners. Alternatively, they could decide to divide up duties based on:

• expertise
• experience, and
• personal interest.

To avoid confusion, it might be useful to develop an LLP agreement—also called a "partnership agreement"—to outline each partner's role in the business.

Provides for Relative Ease of Formation

As stated previously, state law controls the requirements for LLP formation. But generally, it's relatively simple for eligible parties to create an LLP. State laws might also allow existing general partnerships to convert their partnership to an LLP.

To form an LLP, you'll probably need to complete a registration form and file it with the relevant state agency, such as the secretary of state's office or corporations division. You can usually file the registration form online. You'll probably need to pay a small filing fee.

As indicated above, it could be helpful to develop an LLP agreement to spell out each partner's:

• management roles
• financial contributions, and
• share of the LLP's profits and losses.

If your state has adopted LLP laws, you should make sure your agreement doesn't violate any of these laws. Your LLP agreement will serve as the governing document for your business.

Offers Possible Pass-Through Tax Relief

Typically, the LLP shares the limited liability of a corporation but avoids the double taxation associated with a corporation under IRS rules. Rather, LLPs are treated as "pass-through entities." So, the LLP itself isn't taxed as a separate entity under federal tax laws. Instead, the taxes pass through the LLP to the partners who report their share of the partnership's profits and losses on their individual federal tax returns.

As an owner of a pass-through entity, you might be able to take advantage of the 20% pass-through tax deduction. Under this law, you'd only be taxed on 80% of your income instead of 100% of your income, which could result in significant savings.

Certain state laws might not permit pass-through taxation. Your state could impose a state franchise tax on the LLP business entity. Your local tax professional can help you sort out these complex tax issues.

What Are the Disadvantages of an LLP?

While an LLP has many advantages, it also has some drawbacks.

Lack of Uniformity Across States

State LLP laws can differ significantly from state to state. Some states don't recognize LLPs as legal business entities at all. For the states that recognize LLPs, there can be different requirements regarding:

• who can form an LLP
• what paperwork to file to create an LLP
• whether you need a registered agent
• the extent of limited liability for each partner
• whether you must have liability insurance or some other security for liability claims
• how much liability coverage you need, and
• the LLP's tax status.

This lack of uniformity can make it difficult to interpret your own state's laws. Additionally, if you want to register your LLP in a second state, you might need to comply with multiple sets of state laws that vary significantly.

Limited Liability Isn't Absolute

Generally, LLP partners have limited liability. Typically, partners are only liable for their own actions and debts. But a partner's degree of liability can vary from state to state.

A partner's personal liability usually lands on a liability spectrum. In addition to liability for your own negligence and wrongdoing, you might also be personally liable for:

• all of the business's debts and for some or all of your partners' negligence and wrongdoing
• all of the business's debts but not for any of your partners' negligence and wrongdoing, or
• neither your business's debts nor your partners' negligence and wrongdoing.

Your liability for employees' actions also varies from state to state. You should review your state's LLP laws to determine the extent of your personal liability.

How Do You Dissolve an LLP?

The process for dissolving and winding up an LLP is very similar to that of an LP. Generally, you'll:

• review your LLP agreement (or dissolution agreement) to determine the dissolution procedure
• file dissolution papers
• notify creditors and the public of your business's dissolution
• end existing contracts and other business obligations
• sell off ("liquidate") physical assets
• negotiate with your creditors and settle all debts
• distribute any remaining assets to the partners
• close bank accounts, and
• cancel business licenses, registrations, and permits.

For more detailed steps to follow, read how to dissolve a limited partnership.

Seeking Additional Guidance

If you're interested in forming an LLP, contact your secretary of state or similar regulatory authority to find out more about your eligibility to create an LLP. If you're looking for legal advice on whether forming an LLP is the right choice for your business, consider talking to a business attorney. They can help you understand how the advantages of an LLP can best benefit your business. A business lawyer can also help you negotiate and draft an LLP agreement.