Limited Liability Partnerships Explained: Pros and Cons of LLPs

A limited liability partnership is an unincorporated business that individual partners co-own to receive personal liability protection from their business ventures. Business organizations face risks, including the possibility of workplace injuries or breach-of-contract lawsuits. American business law shields LLP members from personal liability for such claims, meaning small businesses can be sued or go bankrupt, but the owners’ personal assets will not be at risk.

A limited liability partnership is also a pass-through entity, meaning the business does not pay taxes on its profits and losses. The profits pass through to the general partners and limited partners, who declare the income on their personal tax returns. In contrast, some business entities—such as C-corporations—must pay a corporate income tax. Business owners then pay the IRS additional taxes via their personal income tax returns.

In a limited liability partnership, multiple business owners join together under an LLP agreement and assume co-ownership of a business. This structure contrasts with that of sole proprietorships (businesses owned by a single person), S-corporations, and C-corporations, which have far more formal structuring requirements. The rules governing an LLP vary from state to state, but they generally require a few common steps.

• Register the LLP with the state. To register with the state, you must file a certificate of limited liability partnership that states the ownership stake of each member. This typically is filed with the secretary of state's office and requires a small filing fee. See your secretary of state's website for specific filing requirements.
• Designate a registered agent. A registered agent is a person who accepts all legal forms on behalf of your LLP.
• Get an EIN. The IRS uses the EIN, or Employer Identification Number, for tax purposes in the same way individuals use social security numbers.
• Write a partnership agreement. A partnership agreement is sometimes legally required and always highly advised. It defines the management structure of your LLP, including who will take an active role in managing the company's affairs.
• Get liability insurance if necessary. If you have an LLP in a field such as medicine or architecture, your company has the potential to face malpractice lawsuits. Liability insurance protects LLPs against such contingencies, and some states legally require it.

An LLC is a limited liability company and a common legal structure for businesses. It differs from an LLP in a few ways.

• Eligibility: Some states limit LLPs to specific fields like medicine, law, architecture, and real estate. By contrast, many types of small businesses can organize as LLCs.
• Liability: Whether you are a general partner or a limited partner in an LLC, you receive liability protection from lawsuits aimed at the business. In an LLP, it is possible that only general partners receive full liability protection.
• Reporting requirements: Some states place greater reporting requirements on LLCs than on LLPs. Documents like a statement of information may be mandatory for an LLC but not an LLP.

A limited liability partnership (LLP) and a limited partnership (LP) sound similar, but they are two different business structures.

• Liability: Limited partnerships do not provide liability protection across the ownership group. The general partners bear unlimited liability for any misdeeds of the business.
• Securities regulation: A limited partnership is typically set up as an investment and fundraising vehicle. This makes it subject to regulation by the Securities and Exchange Commission (SEC) as well as state-level agencies.
• Business operations: An LP is not designed for day-to-day business operations in the same way LLPs, LLCs, or corporations are. It is structured more like a sole proprietorship with the addition of minority owners. In an LP, a general partner runs the business and assumes full liability for its conduct. Limited partners join primarily as investors.

LLPs offer a few advantages for certain business professionals including liability protection for general partners, avoidance of double taxation, and flexibility in adding and removing partners. LLPs also have the ability to structure an ownership group that is different from the employees guiding day-to-day operations.

The primary disadvantage to an LLP is that not all businesses qualify as one. Some states limit LLP status to professionals in specific industries like law, medicine, architecture, and real estate. If you operate a small business in any other field, organizing as an LLC may be a more appropriate choice.

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