Since the 1990s, a limited liability partnership (LLP) has become a popular form of business organization for many licensed professionals, such as:
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.
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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:
Some states, like California, allow only licensed professionals (like doctors and accountants) to form an LLP. Other states, like Texas, 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.)
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.
If you're eligible to form an LLP, you and your partners can take advantage of many of its benefits.
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:
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.
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:
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.
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 (SOS) 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:
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.
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.
While an LLP has many advantages, it also has some drawbacks.
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:
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.
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:
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.
Your ability to form an LLP will depend on your state. If your state recognizes LLPs and you qualify to form one, then you'll generally follow the same steps that you would when forming an LP.
Name your LLP. State law usually requires that the name of your LLP include the appropriate entity designation. For example, California requires your business name to end in "Limited Liability Partnership," "registered Limited Liability Partnership" or a corresponding abbreviation. (Cal. Corp. Code § 16952 (2023).) In Texas, you can use "Limited Liability Partnership" or an abbreviation of the phrase. (Tex. Bus. Org. Code § 5.063 (2023).) For more information, check out our article about FAQ on choosing a business name.
Designate a registered agent for your LLP. Most states, including California, require you to have a registered agent that can accept official papers on behalf of your business. The registered agent must have a physical street address in the state you're registering with. The agent can be an individual (like an employee) or a company. In Texas, you're not required to have a registered agent.
Prepare a partnership agreement. Generally, you're not required to have a partnership agreement, but it's always a good idea to have one. An agreement lays the foundation for how your LLP will be managed and operated and how profits and losses will be split. You don't need to file the agreement with the state.
Obtain an EIN. An LLP is a separate legal entity from its individual partners. Therefore, your LLP must obtain a federal employer identification number (EIN) from the IRS. You need an EIN for an LLP even if it has no employees. You can get an EIN by completing an online application on the IRS website. There's no filing fee.
Register to pay state taxes for your LLP. In some cases—for example, if you'll be collecting sales tax or hiring employees, you'll need to register with the appropriate state taxing authority. Additionally, some states require you to pay a minimum business tax or franchise tax to do business in the state.
Apply for a business license. Depending on what kind of business you are running and where it is located, you may need to obtain local or state business licenses for your LLP.
File annual reports and dues. Many states require businesses to file annual reports along with a fee to keep their company information up to date. States have different deadlines and requirements. For example, Texas requires you to file an Annual Report of a Limited Liability Partnership form (Form 703) by June 1 each year. Unlike many other states, California doesn't require LLPs to file an annual report. But you'll still be responsible for annual taxes.
Obtain malpractice insurance. Some states require you to have malpractice insurance, especially if you'll be providing professional services. You might even be required to have a minimum amount of malpractice insurance before you're eligible for protection from other partners' malpractice. Because professionals aren't protected from their own malpractice, if you're a professional you should make sure you have professional liability insurance—and, if applicable, that your coverage meets any state minimum insurance requirements.
In addition, some states require LLPs for some professions to adhere to additional rules—such as having partners keep up with professional registrations—in order for each partner to be eligible for protection from liability from other partners' malpractice.
The process for dissolving and winding up an LLP is very similar to that of an LP. Generally, you'll:
For more detailed steps to follow, read how to dissolve a limited partnership.
If you're interested in forming an LLP, contact your SOS 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.