ContractsCounsel Logo

Limited Liability Partnerships: How They Work

Clients Rate Lawyers on our Platform 4.9/5 Stars
based on 7,608 reviews
Home Blog Limited Liability Partnerships: How They Work

Jump to Section

Need help with a Partnership Agreement?

Create a free project posting

What Are Limited Liability Partnerships?

Limited liability partnerships, also known as LLPs, are a type of partnership of two or more owners. LLPs are like limited liability corporations (LLCs) but with distinct advantages for general partners. General partners can form an LLP by signing a partnership agreement and filing an LLC operating agreement and Articles of Incorporation with the Secretary of State’s Office.

Here is an article about limited liability partnerships .

How Limited Liability Partnerships Work

LLPs work by allowing general partners to limit the amount of liability they share. These limitations are assigned according to their level of investment in the business.

Limited liability partnerships allow all partners to distribute risk, capitalize on individual abilities, and establish labor divisions. In addition to various benefits, an LLP also guarantees that creditors cannot go after another general partner’s assets if another fails in his or her ability to pay.

Businesses that most often use LLPs include:

  • Insurance companies
  • Accounting firms
  • Law firms
  • Financial management companies
  • And more

Due to the informalities of a general partnership, there are always downsides. However, LLPs shore up these relationships by offering distinct advantages and disadvantages versus more traditional structures.

Here is an article about how a limited liability partnership works .

Advantages and Disadvantages of Limited Liability Partnerships

There are several advantages and disadvantages of limited liability partnerships. Depending upon the jurisdiction, general partners share in limited liabilities. This arrangement works well when general partners do not want to be liable for another’s actions or behaviors.

Meet some lawyers on our platform

Spencer R.

3 projects on CC
View Profile

Antonella C.

1 project on CC
View Profile

Brian R.

1 project on CC
View Profile

Sara S.

44 projects on CC
View Profile

Advantages of Limited Liability Partnerships

  • Advantage #1: Liability is dependent upon the level of investment.
  • Advantage #2: General partners get to enjoy specific tax benefits.
  • Advantage #3: Limited partnerships are considered separate legal entities.

Disadvantages of Limited Liability Partnerships

  • Disadvantage #1: There is more documentation and paperwork required.
  • Disadvantage #2: At least one person must act as a general partner.
  • Disadvantage #3: You must pay expensive self-employment taxes.
  • Disadvantage #4: Attendance of meetings is required for compliance.

Not every business is eligible to operate as an LLP. This limitation is typically due to the rules and regulations set at the state level. Before forming an LLP, it is vital to compare LLPs to other business structures first.

ContractsCounsel Limited Liability Partnership Image

Image via Pexels by Savvas Stavrinos

Comparing LLPs to Other Business Structures

It is a wise move to compare an LLP to other business structures. An LLP is a unique type of business structure, which means that you should consider all of your options before forming one. Other business structures include LLCs, general partnerships, limited partnerships, and corporations.

LLPs vs. LLCs

An LLP is similar to an LLC with a few key differences. General partnerships offer unique tax advantages. However, an LLP also offers the same insulation from financial and legal liability as an LLC for joint ventures and sole proprietorships .

LLCs utilize members instead of partners. Instead of partners owning property and assets, the LLC owns them. LLCs have their own tax ID numbers, whereas partners can have their own that they provide under the LLP.

LLPs vs. General Partnerships

General partnerships occur between two or more parties. They share in the profits and debts of the company. The general partners of the company determine of daily options should be run.

LLPs are for individuals who want the partnership structure with the protection of an LLC. When using this entity, the liabilities of each partner are segregated and limited to specific actions. Additionally, an LLP ensures that any given partner is not liable for the acts of another.

LLPs vs. Limited Partnerships

Limited partnerships may comprise of general and limited partners. Limited partners are focused on the return on investment (ROI) rather than the day-to-day operations. A limited partnership agreement specifies how much involvement they can have.

Under an LLP, the general partners handle routine operations. They take an allocated share of the investment like limited partners as well.

LLPs vs. Corporations

A corporation is another type of business entity. The main difference between LLPs vs. corporations is that corporations allow shareholders. Corporations also follow different tax codes and local, state, and federal laws and offer a corporation or incorporation designation.

LLPs are not publicly traded organizations. Instead, general partners use traditional forms of investment, including bank loans, sweat equity, and more.

Here is an article about comparing LLPs to other business structures .

Get Free Bids to Compare

Leverage our network of lawyers, request free bids, and find the right lawyer for the job.

Get Bids Now

LLPs and Taxation

An LLP avoids double taxation associated with corporate entities. Partners file their own taxes on their share of the profits and losses of state and federal income tax returns. General partners may also pay self-employment taxes as well.

These are a few other issues related to LLPs and taxation:

LLPs Are Not LLCs

While an LLP may insulate general partners financially like an LLC, it is essential to keep in mind that they are not. The main difference from an LLC is that LLPs offer how partners can be taxed at the federal level. Regardless, LLPs are still taxed as partnerships.

LLPs Are Separate Business Entities But Not Taxed Like One

For LLP taxation purposes, they are generally not taxed as separate business entities at the federal level. However, state laws may not allow you to glean benefits from these passthrough entities and impose a franchise tax on the LLP. Corporate lawyers in your state can help you understand LLPs and taxation as it applies to your situation.

LLPs May Be Expensive

Each year, the LLP must register in the state of formation with the local Secretary of State’s Office. Registration fees can cost between $100 - $200 per person. They may also require you to carry a specific amount of professional liability insurance for negligence or wrongdoing.

Tax lawyers can help you understand LLPs and taxation as they apply to your situation. However, here is an article about the basics of an LLP .

How to Form a Limited Liability Partnership

Forming a limited liability partnership is a fairly straightforward process for simple general partnerships. However, these relationships can become increasingly complex in terms of structure, assets, and profit distribution. Choose your partners wisely and thoroughly discuss the terms of your relationship, including liability and expectations.

These are the steps you generally take to form a limited liability partnership:

  • Step #1 : Register the LLP with your Secretary of State’s Office and pay all application fees.
  • Step #2 : Negotiate, draft, and sign a limited liability partnership agreement with the general partners.
  • Step #3 : Work with corporate lawyers to ensure that you comply with local business laws and have appropriate licenses.
  • Step #4 : Obtain an issued Employer Identification Number (EIN) through the Internal Revenue Service (IRS).
  • Step #5 : Pay LLP taxes and file all required documentation with the Secretary of State’s Office annually.

Depending upon your partnership’s dynamics, you may want to have individual partners obtain legal representation individually. Doing so will assist in the efficiency of negotiation as well as consistency and fairness. It can also reduce the claim of signing the agreement under duress in the future if that is an issue you may face.

Here is an article about how to form a limited liability partnership.

Need Corporate Lawyers?

ContractsCounsel can put you in touch with corporate lawyers in your state. Post your project for free .

Need help with a
Partnership Agreement?

Create a free project posting

Meet some of our Lawyers

Scott S. on ContractsCounsel
View Scott
5.0 (27)
Member Since:
October 27, 2021

Scott S.

Free Consultation
New York, NY
16 Yrs Experience
Licensed in NY
Benjamin Cardozo School of Law

Scott graduated from Cardozo Law School and also has an English degree from Penn. His practice focuses on business law and contracts, with an emphasis on commercial transactions and negotiations, document drafting and review, employment, business formation, e-commerce, technology, healthcare, privacy, data security and compliance. While he's worked with large, established companies, he particularly enjoys collaborating with startups. Prior to starting his own practice in 2011, Scott worked in-house for over 5 years with businesses large and small. He also handles real estate leases, website and app Terms of Service and privacy policies, and pre- and post-nup agreements.

George L. on ContractsCounsel
View George
5.0 (4)
Member Since:
August 16, 2022

George L.

Free Consultation
Rock Hill, SC
4 Yrs Experience
Licensed in GA, SC
University of Georgia School of Law

I am a corporate attorney with offices in Rock Hill, SC, and Lavonia, GA. My practice is focused on contracts, tax, and asset protection planning. I act as a fractional outside general counsel to over 20 businesses in 6 countries. When not practicing law, I can usually be found training my bird dogs.

Eric M. on ContractsCounsel
View Eric
5.0 (3)
Member Since:
July 25, 2020

Eric M.

Free Consultation
Pembroke Pines, FL
15 Yrs Experience
Licensed in FL, TX
University of Baltimore

Experienced and business-oriented attorney with a great depth of contract experience including vendor contracts, service contracts, employment, licenses, operating agreements and other corporate compliance documents.

Sara S. on ContractsCounsel
View Sara
4.9 (23)
Member Since:
July 14, 2023

Sara S.

Free Consultation
Washington, D.C.
3 Yrs Experience
Licensed in DC, MD
American University Washington College of Law

With over ten years of intellectual property experience, I’m happy to work on your contractual matter. I am very diligent and enjoy meeting tight deadlines. Drafting memoranda, business transactional documents, termination notices, cease and desist letters, licenses and letter agreements are all in my wheelhouse! Working in a variety of fields, from construction to pharmaceutical, I enjoy resolving any disputes that come across my desk.

Kennedy W. on ContractsCounsel
View Kennedy
Member Since:
July 11, 2023

Kennedy W.

Free Consultation
Holton, KS
4 Yrs Experience
Licensed in KS
Washburn University School of Law

Graduated from Washburn University School of Law with certificates in Tax Law and Business Transactions. Served as a specialized tax advisor and business consultant to clients across the nation over the last 8 years. I have practiced law since 2019, specializing in entity formations, contract drafting, contract review, contract disputes, business transactions, demand letters, legal research, and general business consulting.

Matt T. on ContractsCounsel
View Matt
Member Since:
July 31, 2023

Matt T.

Free Consultation
Dallas, TX
1 Yr Experience
Licensed in TX
Samford University's Cumberland School of Law

Matt is a licensed attorney based out of Dallas, Texas. Despite having recently graduated, Matt has been immersed in the world of Corporate law throughout law school and beyond. As a result, he has benefitted from the unique and advantageous position of experiencing and working on a wide array of matters, such as reviewing, drafting and negotiating contracts, overseeing regulatory compliance, business formation, risk management, and much more. Contact Matt today for a free consultation!

Penny R. on ContractsCounsel
View Penny
Member Since:
July 14, 2023

Penny R.

Free Consultation
Dallas, Texas
36 Yrs Experience
Licensed in TX
Southern Methodist University

I have practiced law for more than 35 years in the State of Texas. I am proud of the relationships I have formed with my clients and the high level of legal advice I have provided over these many years. I am responsive and will promptly address your particular situation. For 35 years I have counseled individuals, partnerships and corporations with regard to business formation, real estate transactions and issues, employer/employee relationships, contracts, estate planning and asset protection. I am licensed to practice law in all state courts in Texas and all federal courts. I have represented plaintiffs and defendants throughout the state in cases ranging from contract disputes to injury claims. I have worked with every type of business you can imagine from individuals to "mom and pop" businesses and businesses with assets of more than $10,000,000. My clients' businesses range from large construction contractors, investment companies, oil and gas companies, and commercial landlords, to name a few.

Find the best lawyer for your project

Browse Lawyers Now
Learn About Contracts
See More Contracts
other helpful articles

Need help with a Partnership Agreement?

Create a free project posting

Want to speak to someone?

Get in touch below and we will schedule a time to connect!

Request a call

Find lawyers and attorneys by city