A limited liability partnership fuses together some of the best elements found in the formation of an LLC with those of a general partnership. This business structuring option is an agreement by at least two people (or more) to own and operate their company. The individuals involved then share operational and managerial duties over their business, sharing in whatever profits or losses become available.
Over 40 states permit the use of a limited liability partnership (LLP) right now, though it hasn’t always been that way. Just two states permitted LLP formation in 1992.
Through this structure, the individual members of the partnership receive added protections against risks normally associated with a business which has not incorporated. You do not have the 100% liability exposure with an LLP as you would a general partnership or sole proprietorship.
A limited liability partnership is not the same as an international “limited partnership,” as the LLP does not require the presence of at least one unlimited partner. It is different than an LLLP too, as this format allows for one or more limited partners, whereas the LLP creates equality in the ownership stake.
If you’re thinking about the formation of a business and which structure to use, then here are the limited liability partnership advantages and disadvantages to review.
List of the Advantages of Forming a Limited Liability Partnership
1. There is much more flexibility in the formation of an LLP.
When a limited liability partnership forms, it become structure in a way which is similar to a limited liability company. Each partner involved in the structure of an LLP must sign-on to the operational agreement which dictates how much each must contribute to the overall whole of the company.
The LLP permits partners to distribute management duties unequally if desired, allowing each partner to bring their unique strengths to the business. It is even possible to have no management authority and still maintain an equal equity right to the business.
2. There are fewer individual risks within the structure of an LLP.
When a general partnership forms, all owners involved with the company share the same risks to their personal finances. That includes any actions of misconduct or contracts signed without the consent from the rest of the group. With the limited liability partnership structure, each partner is responsible for their own conduct. Any issues with misconduct that places their equity stake at risk cannot be applied to every other member of the operating agreement.
3. Some states permit corporate ownership of an LLP.
As with an LLC, the limited liability partnership permits corporate ownership in some states. That allows existing organizations to form relationships to create a new business opportunity without placing their existing structure in a higher plane of risk. Each corporation receives the same benefits as an individual. Their personal assets are not at risk in the relationship, which means their business cannot be sued for the malpractice of their other LLP members.
This structure is one of the few ways that capital investors will get involved with a partnership. It protects their assets, provides them equity, and allows them to have a say in how the new LLP is run.
4. You can extend the reach of an LLP into other states.
One of the unique benefits of forming a limited liability partnership is its ability to operate across state lines in the U.S., even when formation is not permitted in a specific location. You can register the LLP outside of your state if it is not permitted, then file for a certificate in your home state as a foreign corporation to conduct business in your home state. That creates some extra rules on company governing, such as the requirement to have a representative in the other state.
It also gives you the opportunity to operate with the benefits of an LLP when that isn’t permitted under standard business incorporation structures.
5. There are tax advantages to consider when forming an LLP.
Even though the personal assets of each partner are protected from one another in a limited liability partnership, the tax structure for this business is similar to that of a general partnership. Each owner must file their own income taxes, including self-employment tax, and report income through estimated tax filings if the LLP is not withholding their income. Your profits won’t receive the double tax that they would through a corporation, first through the business, then with your personal income too.
Although some LLPs may find individual owners paying more in taxes than they would in another structure, you get to keep more of the money your share of the company earns. Most owners see this key point as an overall advantage.
6. An LLP still holds a legal position as an entity with purchasing power.
If you operate a business as a sole proprietor or a general partnership, then the assets purchased to conduct operations are often classified as personal property. That occurs because the business doesn’t hold the legal status as an entity (some exceptions do apply, depending on where you live).
With the limited liability partnership, the structure is a little different. You and your partners have the power to own, rent, lease, or purchase property to conduct business operations. When you file for your federal tax identification number, you’re permitted to employ people. The LLP can enter into contracts, be held accountable for its actions, and still protect the personal assets of each owner.
7. You’re permitted to choose the name of your business.
Every business, including a sole proprietor, chooses the name of their company when they begin operations. You can choose to incorporate the names of each partner to show how each is a distinct entity within the organizational agreement you’ve created. It can be its own name if you want. This structure gives the limited liability partnership opportunities to pursue branding, trademarks, and other identity-building opportunities while offering a level of privacy to the owners that isn’t always possible with other formation options.
8. Different equity percentages are permitted within an LLP.
The default structure of a limited liability partnership in most states offers an equal equity share to each member involved with the company. Unless local legislation dictates otherwise, the operational agreement of the LLP supersedes the suggested guidelines. It allows owners to assign different shares of equity to each owner when all agree to the details which govern the business.
Some LLPs even offer members to earn profits and have equity in the company even though they are not active participants in the venture. It is one of the few opportunities where a true silent partner is possible without going through a complicated business incorporation setup.
9. It doesn’t cost much to form an LLP when you’re ready to start doing business.
The cost of a limited liability partnership is very competitive in most states. Most owners can finish their incorporation fees for $500 or less. Depending on the business licenses required for your industry, it is possible to register the company for less than $200 in the first year. Before you finish the required articles of incorporation, take a look at the renewal fees required for the company. Some states have a higher renewal cost (because you’re theoretically profiting as a business) than incorporation cost.
List of the Disadvantages of Forming a Limited Liability Partnership
1. There is still some risk to consider when forming an LLP.
Assuming your state allows the formation of a limited liability partnership, there are still some risks that owners must assume as part of the relationship. You are protected against the potential mistakes of other partners because you have your share of the business and they have their shares too. Your protections apply to personal assets when malpractice occurs from another partner. The protections do not apply to the partnership assets involved. You could still lose your equity in the business as an owner because of the actions of other partners.
2. An LLP is not the cheapest way to start doing business.
Although a limited liability partnership is an affordable way to start doing business, there are cheaper options out there. A general partnership is almost always cheaper, though you lose the personal asset protection under that format. If you don’t require a partner, then some states allow sole proprietors to conduct business without a fee if no licenses or sales tax collection are required.
3. Most states limit the formation of an LLP to specific professions or individuals.
Several states in the U.S. require a limited liability partnership to form around a licensed profession, such as architecture or practicing law. Other states don’t put on these stipulations at all. If you check the Secretary of State’s website for Washington State, their description of an LLP is taken verbatim from Wikipedia. Before you draw up your operating agreement and other incorporation documents, make sure that you’re not bound by rules where this disadvantage prevents you from forming under this structure.
4. This business structure is not always recognized as a partnership.
The advantages of a limited liability partnership often apply in the United States. The disadvantages occur both domestically and internationally. Taxing authorities outside of your home state may not recognize the LLP as a partnership when looking at the structure of your business. Some countries do not permit the pass-through income which is possible with the partnership structure. Before conducting business in a region outside of your home state, make sure you know what specific tax responsibilities are in place so you’re not caught unprepared.
5. Partners can act independently within the structure of an LLP.
If you have a lax operating agreement when forming a limited liability partnership, then you may create separate owners who act on their own behalf instead of helping the overall business. The default structure of an LLP does not require partners to consult with each other before entering into contracts or agreements. Every owner, including silent ones with no managerial responsibilities, can negotiate on behalf of the LLP.
You must use the operating agreement to restrict this authority, especially when you have concerns about the history or decisions made by your partners. Clearly outline what is permitted and what is not to prevent an unpleasant surprise in the future.
6. The LLP structure does not provide protection against internal negligence.
If something happens within a limited liability partnership which violates rules, regulations, or laws, then the employee involved isn’t held legally responsible for the outcome. The partnership operating the LLP receives the blame instead. That doesn’t prohibit owners from disciplining or dismissing employees who put the company into such a position. It does mean that business assets could be at risk unless the issue involves member fraud.
The rules involving internal negligence are so robust that a partner who witnesses criminal conduct or rules violations and doesn’t report it can cause the company to lose its LLP status.
7. Public disclosures are sometimes required from an LLP.
Some states and countries which permit a limited liability partnership require public disclosures of their business finances. The requirements may include a release of your accounts, making them become part of the public record. This stipulation would publicly announce the personal income for each partner in the business, which could cause some individuals to be targeted because of their earnings. During a poor year, a high income with partners, combine with layoffs, would make for a poor public image.
8. An LLP is not permitted to retain profits for reinvestment.
Because the standard structure of a limited liability partnership involves pass-through income, the business does not have the option to retain profits for the next year. Owners can add assets to the company if they wish to build its footprint, but it must come from their personal finances. There is no flexibility for this structure in the United States whatsoever. The partners of an LLP always receive their share of the profits, based on the equity they hold, each year. That number becomes what they must report on their annual taxes.
9. There must be at least two people involved to form an LLP.
The limited liability partnership does not offer the single-owner option like a sole proprietorship or some LLCs permit. You must operate with at least two people. If one member must leave the company for any reason (bankruptcy, death, retirement), then the LLP is forced to dissolve. The remaining members could form another partnership to continue operations and transfer assets from the old company to the new, but unless an exception is permitted, there are no inheritance or single-owner benefits permitted under this business structure option.
The advantages and disadvantages of a limited liability partnership (LLP) apply most often to licensed professions. If you’re thinking about working with like-minded professionals in your line of work, then this business option offers protections in ways that a general partnership would not permit. It is not available in each state or country, however, and specific incorporation rules may apply which restrict your access to LLP formation. If it is allowed, you may discover that an LLP gives you the flexibility you want with the protections you need.