Limited Liability Partnerships:
How They Work

Jump to Section

Need help with a legal contract?

CREATE A FREE PROJECT POSTING
Post Project Now

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

Jane C.

12 projects on CC
View Profile

Paul S.

1 project on CC
View Profile

Bryan B.

12 projects on CC
View Profile

Ramsey T.

5 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 .

Explore Our Network of Lawyers

We recruit and onboard great lawyers so you can find and hire them easily.

Browse Lawyers Now

Meet some of our Lawyers

ContractsCounsel verified
Attorney and Counselor at Law
22 years practicing
Free Consultation

Experienced attorney focusing on estate planning, probate administration, business formation and counseling, and consumer bankruptcy.

ContractsCounsel verified
CEO
35 years practicing
Free Consultation

I focus my practice on startups and small to mid-size businesses, because they have unique needs that mid-size and large law firms aren't well-equipped to service. In addition to practicing law, I have started and run other businesses, and have an MBA in marketing from Indiana University. I combine my business experience with my legal expertise, to provide practical advice to my clients. I am licensed in Ohio and California, and I leverage the latest in technology to provide top quality legal services to a nationwide client-base. This enables me to serve my clients in a cost-effective manner that doesn't skimp on personal service.

ContractsCounsel verified
Attorney
37 years practicing
Free Consultation

I am a 1984 graduate of the Benjamin N Cardozo School of Law (Yeshiva University) and have been licensed in New Jersey for over 35 years. I have extensive experience in negotiating real estate, business contracts, and loan agreements. Depending on your needs I can work remotely or face-to-face. I offer prompt and courteous service and can tailor a contract and process to meet your needs.

ContractsCounsel verified
Founding Member/Attorney
7 years practicing
Free Consultation

Tim advises small businesses, entrepreneurs, and start-ups on a wide range of legal matters. He has experience with company formation and restructuring, capital and equity planning, tax planning and tax controversy, contract drafting, and employment law issues. His clients range from side gig sole proprietors to companies recognized by Inc. magazine.

ContractsCounsel verified
Business Attorney
31 years practicing
Free Consultation

For over thirty (30) years, Mr. Langley has developed a diverse general business and commercial litigation practice advising clients on day-to-day business and legal matters, as well as handling lawsuits and arbitrations across Texas and in various other states across the country. Mr. Langley has handled commercial matters including employment law, commercial collections, real estate matters, energy litigation, construction, general litigation, arbitrations, defamation actions, misappropriation of trade secrets, usury, consumer credit, commercial credit, lender liability, accounting malpractice, legal malpractice, and appellate practice in state and federal courts. (Online bio at www.curtmlangley.com).

ContractsCounsel verified
Attorney
22 years practicing
Free Consultation

Real Estate and Business lawyer.

ContractsCounsel verified
Founder
18 years practicing
Free Consultation

Davis founded DLO in 2010 after nearly a decade of practicing in the corporate department of a larger law firm. Armed with this experience and knowledge of legal solutions used by large entities, Davis set out to bring the same level of service to smaller organizations and individuals. The mission was three-fold: provide top-notch legal work, charge fair prices for it, and never stop evolving to meet the changing needs of clients. Ten years and more than 1000 clients later, Davis is proud of the assistance DLO provides for companies large and small, and the expanding service they now offer for individuals and families.

ContractsCounsel verified
Partner
19 years practicing
Free Consultation

Braden Perry is a corporate governance, regulatory and government investigations attorney with Kennyhertz Perry, LLC. Mr. Perry has the unique tripartite experience of a white-collar criminal defense and government compliance, investigations, and litigation attorney at a national law firm; a senior enforcement attorney at a federal regulatory agency; and the Chief Compliance Officer/Chief Regulatory Attorney of a global financial institution. Mr. Perry has extensive experience advising clients in federal inquiries and investigations, particularly in enforcement matters involving technological issues. He couples his technical knowledge and experience defending clients in front of federal agencies with a broad-based understanding of compliance from an institutional and regulatory perspective.

ContractsCounsel verified
Attorney
15 years practicing
Free Consultation

William L Foster has been practicing law since 2006 as an attorney associate for a large litigation firm in Denver, Colorado. His experience includes drafting business contracts, organizational filings, and settlement agreements.

ContractsCounsel verified
Partner
40 years practicing
Free Consultation

Terry Brennan is an experienced corporate, intellectual property and emerging company transactions attorney who has been a partner at two national Wall Street law firms and a trusted corporate counsel. He focuses on providing practical, cost-efficient and creative legal advice to entrepreneurs, established enterprises and investors for business, corporate finance, intellectual property and technology transactions. As a partner at prominent law firms, Terry's work centered around financing, mergers and acquisitions, joint ventures, securities transactions, outsourcing and structuring of business entities to protect, license, finance and commercialize technology, manufacturing, digital media, intellectual property, entertainment and financial assets. As the General Counsel of IBAX Healthcare Systems, Terry was responsible for all legal and related business matters including health information systems licensing agreements, merger and acquisitions, product development and regulatory issues, contract administration, and litigation. Terry is a graduate of the Georgetown University Law Center, where he was an Editor of the law review. He is active in a number of economic development, entrepreneurial accelerators, veterans and civic organizations in Florida and New York.

ContractsCounsel verified
Trademark Attorney
1 year practicing
Free Consultation

I'm a Washington-licensed lawyer specializing in trademark practice and with an extensive trademark education and academic background. I currently work with domestic and international businesses seeking trademark protection in the U.S. by conducting trademark searches, providing legal advice, submitting USPTO applications, and preparing responses to office actions. I'm passionate about trademark law and always looking forward to helping small and medium businesses promote their value by having a registered federal trademark. If you have questions or concerns about trademark/copyright/IP licensing and require legal advice, feel free to contact me so we can have a first chat.

Find the best lawyer for your project

Browse Lawyers Now

Want to speak to someone?

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

Request a call