Partnerships allow businesses to leverage the strengths of individual professionals and minimize operational costs, making them an attractive option. The great downside of most partnerships, however, is that each partner assumes unlimited risk. This puts their personal assets on the line, a risk many families don’t want to take. Limited liability partnerships (LLPs) change this entirely, allowing you to protect your personal assets while getting the full benefits of a partnership. A corporate lawyer from the Priori network can help you explore the partnership laws in your state to see if an LLP is the right decision for you and your business.
What is an LLP?
LLPs are are non-corporate legal entities that operate similarly to general partnerships, but rather than requiring the partners to take on personal liability, LLPs limit the liability of partners to assets held within the company. Like general partnerships, any partner in LLPs can bind the business and carry out business operations. Generally, taxation is also the same, as partners are taxed on the income of the LLP as if it were personal income, making the LLP only a pass-through entity.
LLPs for Professionals
Like LPs and general partnerships, LLPs are established at the state level. Unlike LPs and general partnerships, many states limit LLPs to businesses of independent professionals, such as lawyers, accountants or doctors. Even in states where almost any corporate entity can elect to be an LLP, a majority of LLPs are organized as partnerships between professionals in the same field.
This is because partners can pool resources and clients and leverage each other’s professional reputations while lowering operating costs. LLPs are well-designed to protect partners from claims against other partners operating largely independently, while being flexible enough to customize profit-sharing terms and facilitate easy exits and entrances of partners. Because of their general use by professionals, most LLPs require partners to have business liability insurance for their practices.
Advantages of Limited Liability Partnerships
There are three main advantages of limited liability partnerships for the partners:
- Limited Liability for All Partners. No partner is burdened by unlimited liability.
- Operational and Management Flexibility. LLPs in most states have immense operational flexibility and can be managed as partners set out in the partnership agreement.
- Tax Benefits. Since the LLP is a pass-through entity for tax purposes, there is no double taxation like in a corporation. In addition, partners can set up the LLP in most states to only pull profits from the partnership when needed or wanted, allowing partners to ease the tax burden year-to-year.
Disadvantages of Limited Liability Partnerships
There are three main disadvantages of limited liability partnerships for the partners:
- More Complex Formation Documents. Most states require more specific provisions and more detailed formation documents than needed for LLCs or other partnerships. This means that it can be quite difficult to form without the help of a corporate lawyer. Also, LLPs can be governed by securities laws in some states, further complicating startup requirements.
- Relative Independence of Partners. Because each senior partner is given full management control unless otherwise stated in the partnership agreement, some LLPs have serious management issues.
- Cannot Operate Across State Lines. As LLPs are governed by state law, they often cannot operate across state lines. For many professionals, their licenses have the same limits, thus not complicating business too much, but for some LLPs, this can be a serious limitation.
The cost of forming an LLP can vary based on your particular situation, plans and state of formation. Flat fees for LLP formation for Priori lawyers start around $600 and can range significantly higher. In order to get a better sense of cost for your particular situation, put in a request to schedule a complimentary consultation and receive a free price quote from one of our lawyers.
What’s the difference between an LLP and an LP?
Some people use the terms LLP and LP interchangeably, but in most states, they are quite different from a legal perspective. LLPs do not require any partner to take on personal liability, but LPs require at least one partner with unlimited personal liability for the partnership. In addition, LPs are generally less limited in who may form them than LLPs, which are defined quite narrowly by most states.
What’s the role of a junior partner in an LLP?
Junior partners are a special class of employee within LLPs. They have the same professional license as partners—often called “senior partners” in these cases—and carry out many of the same duties as partners, but they do not share in operational responsibilities or profit-sharing. Generally, junior partners are working towards a role as a full partner under a structured contract.