A limited liability partnership (LLP) is a partnership in which all partners have limited liability for the debts of the LLP or the other partners. It is well suited for professional businesses (law, accounting, and architecture firms).
Learn More About Limited Liability Partnership (LLP)
- Limited liability for all partners
- Pass through taxation
- Suitable for professional groups in states where such groups cannot organize as LLCs (e.g., California)
- Flexible structure allows partners to customize management and profit/loss distribution.
- Can often only be formed by professional groups
- Not generally possible to raise money from third party investors.
Limited Liability Partnership Basics.
An LLC is usually organized with the secretary of state (or its equivalent) in the state where it will operate. The owners, called members, have limited liability—that is, they are generally protected against personal responsibility for the debts and obligations of the LLC, much like shareholders of a corporation are shielded from liability for corporate debts. So if the LLC incurs a liability it cannot pay, its members generally will not be responsible for paying that debt.
Limited liability partnerships (LLPs) are, like general and limited partnerships, businesses consisting of more than one owner. However, unlike with general and limited partnerships, all partners in an LP enjoy limited liability for the debts and obligations of the LLP and the other partners (such malpractice claims against other partners). This asset protection feature makes the LLP attractive to business owners who desire to partner with others, and yet avoid liability for the acts of the partnership and other partners. Note, however, that an LLP partner remains liable for claims arising from his or her own malpractice.
The LLP is a commonly used business form for professional groups, such as accounting, law, and architectural firms. Many states (including California) actually limit the availability of this entity form to certain professionals.
An LLP is owned and managed by its partners. Unless otherwise agreed in the partnership agreement, all partners have an equal say in the management and operations of the LLP. However, the partners may draft the partnership agreement to divide profits and losses, and to prescribe the management obligations of each partner, however they see fit. The LLP is therefore a very flexible business form, and can be organized to suit the unique needs and desires of the partners.
As with general and limited partnerships, an LLP does not pay income tax at the entity level. The LLP’s profits and losses are passed through to the partners, who report and pay income taxes on their share of the LLP’s profits on their individual tax returns.