What is a Limited Liability Partnership?
A Limited Liability Partnership (“LLP”) is a partnership in which the partners are not personally liable for the debts of the partnership or other partners. Unlike a limited partnership, all partners in a LLP can receive limited liability. With the exception of limited liability, the rules governing limited partnerships are extremely similar to the rules governing general partnerships. Most notably, LLPs are taxed in the same manner as general partnerships. For more information on general partnerships, see the article on general partnerships in this series.
Although all states allow some form of a limited liability partnership, in several states, most importantly California and New York, only certain professions such as lawyers, accountants, engineers, and architects can organize as LLPs.
How to Create a Limited Liability Partnership
Although the exact requirements vary from state to state, most state LLP statutes are based on the Revised Uniform Partnership Act. The Revised Uniform Partnership Act establishes four requirements to create an LLP. These requirements are:
- Vote by the Partnership: A change from a partnership to an LLP must be approved in the same manner as a change to the contribution obligations of the partners. If the partnership does not specify the method to amend contribution obligations, a change from a partnership to an LLP must be approved in the same manner as an amendment to the partnership agreement. If the partnership agreement does not specify a method for amending the agreement, all partnership must approve the change from a partnership to an LLP.
- Filing of a Statement of Qualification: To create an LLP, a partnership must file a statement of qualification which includes all of the elements proscribed by state law with the secretary of state.
- Name: The name of an LLP must end with the words “Limited Liability Partnership” or “registered Limited Liability Partnership” or the abbreviation “L.L.P.,” “R.L.L.P.,” “LLP,” or “RLLP.”
- Annual Reports: LLPs are required to file an annual report updating the information contained in the statement of qualification.
Statement of Qualification
Under the Revised Uniform Partnership Act, a statement of qualification must contain five things:
- The name of the partnership.
- A statement the partnership is a limited liability partnership.
- The street address of the office of the partnership’s chief executive. If the chief executive’s office is outside of the state in which the statement of qualification is filed, it must also include the street address of an office in the state.
- The name and street address of the partnership’s agent for service of process.
- An effective date. This is the date on which the partnership will become a limited liability partnership. A partnership becomes a limited liability partnership on the later of the date of filing the statement of qualification or the date specified in the statement of qualification.
Consequences of Organizing as a Limited Liability Partnership
Tax Consequences
LLPs are taxed in the same was as partnerships. This means LLPs are not subject to double taxation and each partner pays taxes on their share of the entities taxable income. LLPs must file IRS Form 1065, explaining the partnership’s taxable income.
Partners in an LLP file IRS Form 1040 and completing schedule E in order to declare their income from the LLP. Partners are taxed on their share of the LLP’s income regardless of whether the income is actually distributed to the partners.
Liability Consequences
Members of an LLP are not personally liable for the debts and/or obligations of the LLP or for the debts and/or obligations of other partnerships. Unlike a traditional partnership in which any partner has the authority to bind all other partners personally, debts and obligations of a limited liability partnership belong only to the LLP. Partners are not liable for contribution to cover the debts of an LLP.
Partners in an LLP are personally liable for any and all claims arising from their own intentional torts, negligence, or contracts. In a limited number of states, a partner of an LLP is personally liable for intentional tort claims against the LLP. A limited number of states also hold partners in an LLP personally liable for contract claims against the LLP. In states where limited liability does not extent to contract or intentional tort claims, an LLP structure limits liability only for negligence claims such as malpractice.
Advantages of Operating as a Limited Liability Partnership
The major advantages of a Limited Liability Partnership are:
- Flow Through taxation
- Limited Liability
- Status as an independent legal entity. An LLP can own property, sell property, sue, be sued, hire, and fire in its own name. For most purposes, an LLP is treated the same as a living person.
- Ability to have multiple owners.
Disadvantages of Operating as a Limited Liability Partnership
The disadvantages of a Limited Liability Partnership are:
- Limited Life: LLPs dissolve upon the bankruptcy, death, or voluntary dissociation of a partner.
- Annual Filing Requirements.
- Liability for a Partner’s own Obligations. An LLPs limited liability is not as far reaching as that of a corporation and does not protect a partner from liability for their own acts, whereas the corporate structure can generally limit an owners liability for their own negligence or contracts.
- Difficulty of Transferring Ownership. Because LLPs are subject to the same rules as partnerships, a partner in an LLP cannot transfer their ownership interest without the consent of the partnership.
Legal Disclaimer
This website provides information addressing legal topics of interest to the general reader. You should not consider this information designed or adequate to meet any of your particular legal needs, concerns or inquiries. You should consult with a lawyer licensed to practice law in the jurisdiction appropriate to your legal situation to assess your situation and provide you with appropriate legal advice.