Limited Liability Partnership

A limited liability partnership (LLP) is a form of business partnership that provides some legal protection for the partners. In a standard partnership, each partner is fully and personally liable for the debts and obligations of the business, even those incurred by other partners. In contrast, an LLP limits the legal and financial exposure of any specific partner to his or her specific investment in the partnership.

Key Benefits

While an LLP limits the personal liability of partners for the acts of other partners or the partnership as a whole, it continues to offer the partners many of the benefits of a traditional partnership.

• An LLP is a pass- through business entity for federal tax purposes. Unlike a corporation, the partnership isn’t taxed on its income. Each partner is taxed for their personal share of the profits.
• The governing document, the partnership agreement, and laws generally allow for greater management flexibility than usually allowed to a corporation.
• The LLP has great discretion for allocating profits according to the various partnership agreements.

Barriers to Setting Up an LLP

In most cases, the biggest barrier to setting up a limited liability partnership will be the laws of the state. A few states don’t even allow the establishment of LLPs. Many states do, but even some of those limit LLP formation to certain types of businesses.

Where LLP formation is limited by business type, it’s generally reserved for professional firms, such as lawyers, accountants, consultants, and architects. Each state that limits LLPs to certain professions will clearly state the criteria, but they’re often professions that require some certification or licensing. In these types of business, each partner often works quite independently from the other partners, so it makes sense that the partners as a whole don’t want to bear legal or financial risk for the acts of other partners.

Limits

The partners’ legal liability isn’t absolute. First, the individual partners, due to the nature of their profession, often take professional liability insurance for any malpractice suits against them personally.

In addition, each partner has a duty of care towards the partnership. The partnership agreement will set out the specific duties and obligations of the partners. If a partner breaches the partnership agreement, he or she can be held liable by the LLP itself for breaching his or her duty of care.

Finally, some states only allow the LLP to protect its partners against negligence claims. However, the LLP partners can still be held liable for contracts made by the LLP or for intentional wrongs committed under its auspices.

Set Up

In order to set up an LLP, the partners need to draft a limited liability partnership agreement. It must then be registered with the proper state authority. To register, the LLP must have received a federal Employer Identification Number and have chosen a legally appropriate name. State naming laws will vary, but the partnership must always include “LLP” in its name.