A Limited Liability Partnership, commonly referred to as an LLP, is a partnership structure that provides certain liability protections to its partners while preserving many of the features of a general partnership.
An LLP is generally owned and managed by its partners. Unlike a limited partnership, an LLP does not require separate general partners and limited partners. Instead, all partners may participate in the management of the business, subject to the partnership agreement and applicable state law.
The scope of liability protection provided by an LLP varies by state. In general, LLP status may help protect partners from personal liability for certain debts, obligations, malpractice, negligence, or misconduct of other partners or employees of the partnership. However, partners may remain personally liable for their own negligence, malpractice, wrongful acts, personal guarantees, or other obligations for which liability is imposed by law.
In some states, LLPs are available to many types of businesses. In other states, LLPs are limited to certain licensed professionals, such as attorneys, accountants, architects, engineers, or other regulated professions. Some states also impose additional requirements on LLPs, such as professional licensing approvals, registration with a licensing board, minimum insurance coverage, financial responsibility requirements, or use of an escrow account.
For example, New York’s registered limited liability partnership statute applies to partnerships without limited partners whose partners are professionals authorized to render professional services in New York. New York also requires LLPs to complete a publication requirement after registration.
For federal tax purposes, an LLP is generally treated as a partnership. A partnership files an annual information return to report its income, deductions, gains, losses, and other tax items, but it generally does not pay federal income tax at the partnership level. Instead, profits and losses pass through to the partners, who report their share on their own tax returns.
Potential Advantages of a Limited Liability Partnership
- Pass-through taxation: Income, deductions, gains, losses, and credits generally pass through to the partners.
- Partner liability protection: Partners are generally protected from certain debts and liabilities of the partnership, subject to state law and applicable exceptions.
- Flexible management: Partners may generally participate in management without creating separate general partner and limited partner roles.
- Professional practice structure: LLPs may be useful for certain professional firms that are permitted or required to operate as partnerships.
- Conversion from a general partnership: In some states, an existing general partnership may be able to register as an LLP without converting into a corporation or LLC.
- Flexible internal governance: The partnership agreement can address management authority, profit and loss allocations, voting rights, partner admissions and withdrawals, transfers, and dissolution.
To create or register an LLP, the required registration or formation document must be filed with the appropriate state filing office, and the applicable state filing fees must be paid. Depending on the state and profession, additional approvals, insurance, licensing-board filings, publication requirements, or annual registrations may also be required.
Because LLP requirements and liability protections vary by state and profession, business owners and licensed professionals should review the applicable state law and licensing rules before forming or registering an LLP.
Click here to obtain the form to register a Limited Liability Partnership (LLP).
