What is a Limited Liability Partnership?
A limited liability partnership is a business structure that is essentially a general partnership, with one key difference. Unlike a general partnership, where individual partners are completely liable for the formation’s debts and obligations, a limited liability partnership will provide individual partners protection against personal liability and distinct partnership liabilities.
A limited liability partnership provides its owners with limited personal liability. Limited liability partnerships are beneficial for professional groups, such as attorneys or accountants. In fact, in some U.S. states (such as California, New York and Nevada) a limited liability partnership can only be formed for professional purposes. Professionals often prefer a limited liability partnership because they will not be personal liable for another partner’s problems, particularly obligations attached to lawsuits or debts. A limited liability partnership will protect each partner from debt obligations against the formation. The laws surrounding the formation and activity of a limited liability partnership will vary from state to state and country to country.
Limited Liability Partnerships in the United States:
In the United States, individual states implement their own laws to govern the formation of a limited liability partnership. Limited liability partnerships first emerged in 1991, through the passing of a Texas statute. Texas passed this legislation to curb liability issues that ran rampant in partnership formations.
Limited liability partnerships were structured following the collapse of the real estate and energy markets in Texas. This collapse led to a tidal wave of savings and loan failures. Because the amounts recoverable by financial institutions were relatively small, efforts were made to recover funds from the accountants and lawyers who advised the institutions during this time.
Lawyers and accountants were liable and thus subject to the possibility of huge claims that would ultimately bankrupt them personally. Not only were the responsible professionals liable for these claims, but their partners were also required to fulfill debt obligations—partnership laws To mitigate these issues, limited liability partnership laws were passed to protect innocent members of these partnerships from debt obligations.
The laws surrounding the formation of a limited liability partnership will vary from state to state. Section 306 © of the Revised Uniform Protection Act is the standard statute adopted by bulk of states in the U.S.—this legislation grants a limited liability partnership with a form limited liability protection similar to that of a corporation. The legislation states the following:
An obligation of a partnership incurred while the partnership is a limited liability partnership, whether arising in contract, tort, or otherwise, is solely the obligation of the partnership. A partner is not personally liable, directly or indirectly, by way of contribution or otherwise, for such an obligation solely by reason of being or so acting as a partner.
Some states will implement their own laws—in addition to those provided by the above legislation—to govern the formation and activity of a limited liability partnership. For instance, some states will only provide liability protection against negligence claims. This provision states that partners in a Limited Liability Partnership can be held personally liable for intentional tort and contract claims brought against the broader formation.
As is common with a partnership or a limited liability company, the profits generated by a limited liability partnership are allocated among the partners for tax obligations. This avoids the double taxation problem often found in the corporate business model.
How to Start a Limited Liability Partnership:
As stated above, a limited liability partnership will protect the personal wealth of each member in the formation. Moreover, the limited liability partnership provides protection against lawsuits that may arise because the actions of individual members of the partnership. Limited liability partnerships are typically registered following the formation of a partnership. The following steps are required to form limited liability partnerships:
1. Contact your local government’s business division to locate the correct legal documents for your filing—remember each state implements their own rules and regulations regarding the formation of a limited liability partnership. Not all states require specific forms, but most do.
2. Satisfy your state’s insurance or licensing requirements; these requirements will vary by state, but are mandated regardless of the intricacies associated.
3. File all forms required by the state. The majority of states require the partnership name to include the words “limited liability partnership or “LLP” as an abbreviation.
4. File the forms with the attached fees. The majority of states will charge a flat annual registration fee, but others may charge a fee based on the number of partners listed on the limited liability partnership form.
5. After you have filed the forms, wait for the notification of receipt and acknowledgment. Once you receive this document your partnership is now classified as a limited liability partnership with all the appropriate rights and responsibilities attached.
The following is an example of the requirements necessary for registration in the state of New York (remember New York requires only professionals to form a limited liability partnership):
In New York, a partnership, without limited partners, whose partners is a professionals authorized by law to offer professional services, may register as a limited liability partnership with the Department of State by filing a Certification of Registration according to Section 121-500(a) of Partnership Law.
The state of New York requires that within 120 days after the filing of a certificate of registration, a limited liability partnership must publish—in two media publications—a copy of the certificate of registration or a notice related to the registration. The publications (i.e. newspapers) must be designated by the county clerk’s office where the principal office of the limited liability partnership is located—as defined in the certificate of registration. Once published, the printer of the publication will provide the partners of the LLP with an affidavit of publication. The certificate of publication—with the affidavit attached—must be submitted to the New York Department of State.
Pros and Cons of an LLP:
Limited liability partnerships are businesses created under the organizational structure of a general partnership. Limited liability partnerships provide companies the same taxation features as standard partnerships; however, each partner is awarded liability protection against the maneuvers of their partners.
The most notable advantage offered by a limited liability partnership is that the formation limits the liability of a partner to the individual’s actions; the partner is protected from liability issues that arise as a result of his or her partner’s negligence or misconduct.
In addition to liability benefits, a limited liability partnership is easier to create than other business formations. An LLP does not have the strict filing requirements that a state will place on other types of businesses. Moreover, state laws do not require that the partnership be recreated if a new partner is added or existing partners are moved.
Although a partner is not liable for other partner’s actions, all partners are responsible for the general obligations of the formation—individual partners are accountable for the limited liability partnership’s operating expenses and other debt obligations (vehicle leases, property leases and business loans). The liability protection offered by the formation also does not provide a shield for fraud claims or the actions of the LLP’s employees. Moreover, individual partners are also not protected if they are a part of or witness another partner’s criminal actions.
Taxation Benefits Associated with the LLP:
Entities operating as a limited liability partnership are taxed under the partnership classification by the IRS through the pass-through taxation process. Under this classification, the company’s profits are passed down to the partners who are then required to report their individual earnings on their tax returns. This process enables the entity’s profits to skip the corporate level, thus avoiding a federal income obligation.
Disadvantages Associated with an LLP
Because of the multifarious nature of LLP laws, limited liability protection formations are not available to all businessmen—as stated above, a limited liability partnership may be only available to professionals, such as attorneys, doctors, architects or accountants. Furthermore, dissimilar to limited liability companies—which have perpetual life—a limited liability partnership may be terminated or dissolved when the general partner leaves the business. This, however, can be prevented if a partnership agreement is formed that affirms a process if such a situation arises.
Limited Liability Partnership Agreements:
A limited liability partnership agreement is no a legal requirement, however, owners of a limited liability partnership should create one to avoid a number of state-imposed restrictions. The limited liability partnership agreement establishes the provisions and conditions of the relationship between the partners of the formation. By placing these provisions in writing, future conflicts can be resolved; the partnership agreement is used as the framework to mitigate problems associated with distribution, liability and management. Although partners can agree on anything—and subsequently affirm these agreements in the agreement—the minimum articles for a limited liability partnership are strongly suggested:
Purpose and Name of the Limited Liability Partnership:
All of the LLP’s partners should be documented in the partnership agreement. Some states will not place a limit on the number of partners that can be included in the Limited Liability Partnership, however, the majority of states will limit the formation in terms of numbers or occupation—as stated above, some states reserve the formation to only professionals that are licensed to do business in the particular state. Furthermore, the nature of the limited liability partnership should be outlined to avoid deviation from the formation’s stated purpose.
The date the partnership officially formed and the expected duration of the business should also be included in the partnership agreement. In most instances, a partnership is dissolved after the death of its partners, however, because a limited liability partnership can have unlimited partners (in some cases) additional provisions can be attached in the agreement to address the transfer of ownership and how the formation will proceed if members leave or pass away.
The limited liability partnership agreement should elucidate on the amount of funds and non-cash contributions that each individual partner is responsible for. Non-cash contributions will include services, furnishings, time, rental space, goods or other types of property that can be utilized by the business. Each partner’s contribution should be noted in the partnership agreement to help organize a distribution plan and to relegate decisions aligned with the formation.