Key Features of Limited Liability Partnerships
A Limited Liability Partnership (LLP) is a business structure created by state statute that blends traditional partnerships with limited liability features, allowing partners to divide management duties and limit their personal liability for business debts and litigation.
Similar to a general partnership, LLPs have two or more partners who represent the business but the differences lie in the personal liability of the partners. While a general partnership creates unlimited personal liability for the partners, each partner in an LLP is not liable for the debts and liabilities of the other partners or the business itself.
Partnerships are typically formed by agreement and are generally managed by the participating partners, giving them a large degree of control over the business. The partners may also decide their share of profits, quality of responsibilities, and even the number of partners.
Advantages and Disadvantages of LLPs
- Lower taxes than a standard corporation and no restrictions on partners’ compensation as per corporation laws
- Allows partners to become personally involved in furthering its goals, providing more control than a corporation
- No need to register with the Securities and Exchange Commission, unlike corporations
- A wide range of management and operational flexibility
- Generally easier to set up than a corporation
- Personal liability is limited but not completely eliminated
- Possibility of incorrect filing and documentation
- Uniform regulation across states
- More paperwork needed as compared to a general partnership
- Dissociation of a partner can negatively impact the business
How to Form an LLP: A Step-by-Step Guide
- Choose a Business Name: Decide on a unique business name that complies with the state’s standards and then confirm whether it has already been registered.
- File Your Formation Documents: Prepare your formation documents and then file them with the secretary of state.
- Draft Your Partnership Agreement: Create a partnership agreement that outlines the roles and responsibilities of each partner.
- Acquire Local Licenses: Depending on what the business does, obtain all necessary local licenses and permits.
- Retain EIN: Obtain an Employer Identification Number (EIN) from the IRS and use it for everything from filing taxes and opening a business bank account to filling out paperwork.