pixelfit / Getty Images Partnerships come in several different types, but all have some common characteristics. An LLP combines some of these advantages of a partnership with the benefits of a corporation. Learn more about how they work and how they compare to other partnerships.
What Is a Limited Liability Partnership?
An LLP is a form of partnership that limits liability for partners more than some other partnerships do. To understand limited liability partnerships, it’s helpful to understand a few things about partnerships in general. All partnerships consist of individuals who have agreed to run a business together under the terms of a partnership agreement. Each partner has invested in the business. Partners are not employees. They take money from the business as distributive shares, not as salaries. All types of partnerships pay income taxes by filing an information tax return on IRS Form 1065, with individual partner shares of the income or losses of the partnership reported on a Schedule K-1. Partners then report their shares of income on their federal personal returns, although not all states allow this type of “pass-through” taxation at the state level. The partnership is a separate legal entity from the partners, but the partners have liability for the actions of the partnership in most cases. This arrangement differs from a corporation, which is separate from its owners with regard to liability. In an LLP, however, partners are shielded from liability for the actions or debts of other partners or employees.
Acronym: LLP
How a Limited Liability Partnership Works
An LLP differs from a general partnership or a limited partnership in that all partners are protected from liability for the wrongful acts or negligence of other partners in an LLP. An LLP combines characteristics of partnerships and corporations, particularly in the area of limited liability. A partnership typically doesn’t provide its individual partners with limited liability from lawsuits and debts. In an LLP, however, all partners have limited liability from errors, omissions, negligence, incompetence, or malpractice committed by other partners or by employees of the firm, just as in a corporation. Many professionals form LLPs because it protects them from being involved in a malpractice lawsuit against another partner, at least to some degree.
Limited Liability Partnership vs. LLCs
The most obvious difference between an LLP and a limited liability company (LLC) is that the owners of an LLP are partners. The owners of an LLC are referred to as “members.” While partners in an LLP are not typically liable for the debts or negligent acts of other partners, the liability protection for members of an LLC extends to the business’s debts as a whole or any legal actions against it in court. Wrongdoing or gross negligence outside the scope of the owner’s duties doesn’t have liability protection in either type of business—for example, if an owner sexually harasses an employee or client, steals from the company, or physically assaults someone. LLC members can decide between member management and hired management, while partners in an LLP manage the partnership themselves according to the partnership agreement. Additionally, an LLC has several tax options. It can be taxed as a corporation or as an S corporation. An LLP can only be taxed as a partnership.
LLPs vs. Limited Partnerships
An LLP should not be confused with a limited partnership, which is a different partnership structure. Whereas an LLP limits liability for all partners, a limited partnership only limits it for some. In a limited partnership, at least one owner must be on record as the general partner with unlimited liability, and at least one partner must be listed as a limited partner with limited liability. The limited partner cannot have significant money invested in or hold major decision-making power in the business. If they do, they risk losing their status as a limited partner and forfeiting their limited liability.
How to Form a Limited Liability Partnership
A limited liability partnership is formed in the state in which the partnership does business. Most states have a business filings section in their office of the Secretary of State or an equivalent department. The partnership must register specifically as an LLP, filing a form as a “limited liability partnership” or a similar type of declaration. The partnership should also create a partnership agreement to spell out how the partnership will be run and what happens in various circumstances. Most states allow all professionals to form LLPs, but a few states limit the ability to form an LLP to only certain professions.
