LLP

What is a limited liability partnership (LLP)?

An LLP is a legal business entity that combines the flexibility of a partnership with the liability protection of a limited liability company (LLC). It's a type of general partnership that limits each partner's personal liability to their own contributions and actions. In other words, partners generally aren't responsible for the debts or actions of other partners.

Two or more limited partners generally form an LLP by filing documents with their state's business agency. Requirements vary by state, but LLPs typically file a certificate of limited liability partnership, which outlines basic business information like the company's name, address, and partners' names.

That said, not all states recognize this structure and some states only allow certain businesses, such as licensed professionals, to form LLPs. That means that you may need to register your company as a different business structure if you move or expand it into a state that doesn't recognize LLPs.

There are several advantages if you can form your business as an LLP, particularly for professionals or larger partnerships that want more flexibility in how they structure their business. Here are some of the benefits of an LLP:

• Professional credibility. Some states only allow professional services firms—such as medical practices, law firms, and accounting firms—to operate as an LLP.
• Tax benefits. LLPs are generally taxed as pass-through entities, meaning they only pay income tax on their personal tax returns, avoiding double taxation.
• Liability protection. LLPs are separate legal entities from their owners, which can generally protect the owner's personal assets from the partnership's debts.
• Flexibility. LLPs allow the partners to agree on business operations, such as how to handle profit-sharing and decision-making.

FAQs 

What is the difference between an LLC and an LLP?

There are several differences between an LLC and an LLP. For example, LLCs can register in any U.S. state, but LLPs may face more restrictions in some states. In terms of liability protection, LLPs may offer more protection. While LLC members generally aren't personally liable for business debts, they are liable for the actions of other members. In an LLP, partners are only personally liable for their own actions.

Do you need a written partnership agreement to start an LLP?

States generally don't mandate written partnership agreements, but often highly recommend them. Partnership agreements are an internally binding contract that clarify the relationship between partners—their duties and responsibilities—and establish how the organization makes decisions. In turn, partnership agreements can prevent future disputes or inform how disputes that do arise are handled in court.

How does an LLP work?

Generally, partners contribute capital, resources, and expertise to the LLP and split management equally. The personal assets of the partners are often protected, even if the LLP or individual partners incur debts or liabilities. Profits are distributed to the partners according to the terms of the partnership agreement and each partner reports their share of the LLP's profits on their individual tax returns.

What is the difference between an LLP and a general partnership? 

A limited liability partnership (LLP) and a general partnership differ in the liability of the partners. Partners are personally liable for the debts and obligations of the business in a general partnership, while each partner has limited liability in an LLP. Additionally, an LLP is a separate legal entity from its partners, which allows its partners to enter into contracts and own property in the name of the business.