Limited Liability Partnerships: 4 Benefits of Forming an LLP

Like getting married, anyone can agree to run a business together. It is another thing entirely to actually do the thing, which is to navigate the complexities and challenges involved in starting a business.

The advantages of a limited liability partnership include liability protection in case the business or one of you makes a mistake, as well as simplified taxes and the ability to add new partners. Read more to get the procedure for llp registration.

What is an LLP?

LLPs, or limited liability partnerships, allow business partners to protect their personal assets. The unique feature of LLPs is that partners are not liable for the actions of other partners, employees, or the partnership itself.

Due to this protection, LLP business structures are popular among lawyers, accountants, doctors, dentists, architects, and other professionals who require licenses to operate (and may lose their licenses if convicted of malpractice). Professional businesses requiring licenses are not permitted to form LLPs in some states.

In what ways does forming an LLP benefit you?

Business owners can benefit from LLPs in terms of taxation and liability. LLPs offer the following benefits:

Providing liability protection. Partner liability for the failure of one of their partners and, potentially, the entire business is usually protected by LLPs, but state laws vary. Occasionally, state rules change as well. In order to understand what might apply to your business, you should check the local rules where you operate.

A taxation system. In an LLP, profits and losses are added to a member’s personal tax return because the partnership is considered a pass-through entity.

There is a low barrier to formation. Forming an LLP is generally a straightforward process that involves some paperwork and fees. Limited liability partnership owners usually need to fill out documents required by the secretary of state’s office, such as a certificate of limited liability partnership, and pay a fee, which can range from $40 to $1,000. Annual reporting is also required by most states to ensure compliance. Reporting requirements vary from state to state, but they typically include basic information such as your business address, the names of your partners, and the registered name of your LLP.

Adaptable to changing circumstances over time. As long as the partnership agreement allows it, new partners can join and longtime members can leave without disrupting the core business.

The difference between an LLP and a general partnership

A limited liability partnership differs from a general partnership, in which partners are personally liable if the business faces legal action as a result of the wrongdoings of a partner. A general partner may be required to cover business debts with personal assets, such as savings and real estate. Similarly, sole proprietors are at risk.

It is the legal structure of an LLP that protects partners from having their personal assets seized if another partner commits fraud or malpractice.

The difference between an LLP and a limited partnership

Unlike a general partnership and an LLP, a limited partnership is a third type of partnership. The partners in a limited partnership can be either general or limited. A general partner manages the daily operations of the business, while a limited partner provides financial support. Limited partners aren’t responsible for business debts as long as they don’t participate actively in the organization’s operations. The general partner, however, could lose their personal assets to cover business debts or legal obligations.

LLPs may be able to offer limited liability to all their partners. There is also no hierarchy between general and limited partners in LLPs, like in a limited partnership. Partners can instead customize the leadership and management structure of the LLP to meet their specific needs. A partnership agreement outlines the roles and responsibilities of partners.

LLPs and LLCs: key differences

In addition to partnerships, a group of business partners can also form other legal entities. In addition to LLPs, LLCs are another popular option, although they differ in several important ways.

Liability

LLCs and LLPs protect their owners from personal liability in the event of litigation or business debt.

They differ in that LLPs go a step further by protecting individual partners from liability for the torts (or illegal acts that could lead to a lawsuit) of other partners, employees, or the partnership itself.

Ownership and eligibility

Both LLCs and LLPs are generally available to groups of people who want to form a business together. Neither LLCs nor LLPs have a limit on the number of owners (called “members” or “partners” respectively).

The rules about who can form an LLC or an LLP vary by state. It is possible to form an LLP in some states, but you must be a licensed professional, such as a lawyer or accountant, to do so. Certain states, such as California, prohibit those professionals from operating as LLCs. You should check with the appropriate state agency, usually the secretary of state, to find out what is allowed where you operate.

Taxation

How they’re similar: Pass-through entities include LLCs and LLPs. Whenever money is earned through a business, it is considered the owners’ personal income for tax purposes.

How they’re different: To reduce their self-employment taxes, LLCs can elect to be treated as corporations, usually S corporations. There is no such option for LLPs. To ensure compliance with compliance requirements, most state tax agencies require LLPs to report annually. LLPs are required to file annual reports with their states that include information such as the number and names of their partners, their business address, and the LLP’s registered name.

Final thoughts

Here are some questions for you and your business partners to think about as you determine how to structure your new business partnership.

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