Written by Meredith Hart @meredithlhart
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If
you're an entrepreneur, there are a few legal structures you can pick for your
business. You can choose a sole proprietorship,
corporation, general partnership, limited liability company, or limited
liability partnership. In this guide, we'll specifically take a look at LLPs,
or limited liability partnerships.
What
is an LLP?
A limited liability partnership (LLP) is a formal partnership
between at least two business partners. Each business partner is provided with
limited liability, which means they aren't fully responsible for the business'
debts or liabilities. Partners in an LLP aren't liable for the negligent acts
or malpractice of a single partner — each partner is accountable for their own
negligence.
Now
let's discuss some benefits and challenges of limited liability partnerships.
Benefits of Limited Liability Partnerships
·
Member personal asset protection:
If an LLP were to be sued, the personal assets of each partner would be
protected.
·
Flexible management:
Partners in an LLP determine management structure themselves, with each partner
choosing how much management responsibility they would like to have.
·
Legal entity:
Once formed, an LLP is considered a legal entity separate from its members that
can enter into contracts, or own or lease property.
Managing
an LLP isn't without challenges. If an LLP were to be sued, though the personal
assets of each partner would be protected, the assets in the partnership could
be lost. Though the partnership would be the target of a lawsuit — the partner
who's at fault or was negligent could be personally liable for their actions.
Additionally, member turnover is a consideration. In the event a partner leaves
a two-party LLP, the company may have to dissolve.
Examples of Limited Liability Partnerships
Common
businesses that become LLPs are law firms, accounting firms, and doctor offices
because multiple partners are involved in the business. The guidelines for
starting an LLP will vary by state (for reference, here's the LLP information for the state of
Massachusetts) and the amount of limitation varies by state as well.
Limited Partnership
A limited partnership (LP)
is a legal partnership between at least two partners — a general partner, and a
limited partner. General partners are responsible for making business
decisions. Liability protection covers the limited partner, while the general
partner is personally liable for the debts of the partnership.
Pros and Cons of a Limited Partnership
Pros
§ Pass-through
taxation: Income from the partnership is not taxed at the corporate level.
All profit and loss amounts are reported on the partner’s personal tax returns.
§ Personal
asset protection: Limited partners are only liable for what they have invested in
the business — their personal assets are protected.
§ The
ability to add more limited partners: This business structure has
the flexibility to add more parties to the partnership at any time. Doing so
can assist with adding capital to the business.
§ Limited
partners can leave at any time: If a party chooses to leave
the limited partnership, they can do so without dissolving the company
Cons
§ Liability
for general partners: In an LP, general partners carry the company’s debts and
liabilities. The general partner is considered responsible in the event of a
lawsuit or bankruptcy.
§ Limited
partners unable to make decisions: Since limited partners are not
involved in the daily operations of the business, their say in business
decisions is limited.
LLP vs. LP
The
key difference between an LLP and an LP is that the LP only protects the
limited partner from personal liability and only the general partners are
personally liable. And in an LLP, all partners are provided with limited
liability, and their personal assets are protected from the negligence of
another partner.
Unlike
an LLP where all partners can make business and operational decisions, the
general partners are the only decision-makers in an LP.
LLP vs. LLC
Both LLPs and LLCs limit the amount of liability or responsibility
a business owner has for their company's debt. LLPs must have at least two
partners, while LLCs can have as few as one. LLCs can be taxed as a corporation
or partnership, while LLPs are taxed as partnerships.
While
limited liability partnerships and limited liability companies sound similar,
they are different business entities. And below, we'll take a look at the key
elements of an LLC.
Limited Liability Company
A limited liability company
(LLC) is a legal entity that can have more than one owner and has the
characteristics of a corporation and a partnership. Owners are also known as
members, and the members aren't personally responsible for the company's
liabilities or debts. And there isn't a limit to the number of
members an LLC can have.
For
example, let's say Maria and Scott are partners in a bike business. One of
their bike models malfunctioned and many customers were injured as a result. If
they operate their business, Maria & Scott's Bicycles, an LLC, they
wouldn't be personally liable for the injuries.
Pros and Cons of a Limited Liability Company
Pros
·
Pass-through taxes:
This means that the business' taxes are passed to the individual partners,
preventing double taxation.
·
Personal assets are protected:
Members aren't personally liable for any debts.
·
No residency requirement: You
don't need to be a U.S. citizen to start an LLC.
Cons
·
Tax inconsistencies:
Depending on the tax elections of the LLC, the IRS can treat LLCs as a
corporation, partnership, or part of the owner's tax return, but
this will vary by state.
·
Member turnover:
If a member leaves the company, the company may be subject to dissolution.
·
Stakeholder limitations:
In an LLC, shares of the business can't be issued to potential investors or
stakeholders. If you'd like to take your business public in the future, this is
an important point to take into account when considering an LLC.
Choosing
a business format that's right for you and your business partners takes careful
consideration. To learn more about different business structures, read about how to start a business
next.
This
article does not constitute legal advice. The steps required to form an LLP may
differ from state to state, so you should seek your own legal advice to ensure
you follow the correct process.
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