Limited liability partnership (LLP)

What is an LLP?

A limited liability partnership, also called an LLP, is a common business structure for law firms, medical practices, and other partnerships of licensed professionals. The structure of an LLP allows professionals to operate collectively and benefit from economies of scale without putting their personal finances at risk.

An LLP is a type of business partnership that limits its partners personal liability for any debts or damages incurred by other partners or by the partnership itself. In other words, an LLP partner’s personal liability is limited to any assets they may have contributed to the partnership and any debts or damages incurred by their own actions.

An LLP must have two or more partners. In some states, the ability to form an LLP is limited to professional services practices. Other states allow an LLP to be used by any type of partnership. 

How does an LLP work?

Like most other types of partnership or company, an LLP structure provides plenty of flexibility for how the business will operate on a daily basis. Here are some of main features of LLPs that founders might consider when deciding if it’s the correct structure for their business: 

Economies of scale

For the skilled professionals who typically form LLPs, two of the structure’s main appeals are the ability to limit personal liability and the ability to achieve economies of scale. Working in a partnership structure allows professionals to save on costs related to things like rent, support staff, and equipment. A lawyer working at a large law firm, for instance, can more easily delegate some tasks to associates and paralegals and spend more of their time on high-leverage work.

The scale of being part of a large organization can also create new opportunities that aren’t possible for independent operators, such as branding and marketing to attract new clients. 

Managing an LLP

Most LLPs are member-managed. The LLP structure largely gives partnerships freedom to decide on their own management structure. All partners are legally eligible to be involved in managing day-to-day operations, unlike in a limited partnership. But many LLPs divide decision-making responsibilities among partners, achieving another economy of scale. 

The LLP partnership agreement

At the formation of an LLP, the partners typically sign a partnership agreement. This agreement is a contract that defines many key aspects of the partnership, including the division of ownership, the division of any profits, regulations for resolving disputes, and guidelines for how to sell or dissolve the partnership. In most cases, all partners in an existing LLP must vote to approve changes to their existing partnership agreement (similar to an LLC’s operating agreement). 

Taxation

LLPs are taxed by the IRS as pass-through entities, which means that the partnership itself pays no taxes on any profits. Instead, untaxed profits are passed on to the partners, who then pay personal income taxes on their share. 

This tax treatment is similar to LLC’s, which also receive pass-through taxation. It differs from the tax treatment for corporations, which are subject to double taxation: The corporation pays corporate taxes on any profits, and then shareholders are taxed separately on any distributions they receive. 

Limited liability partnership vs. limited liability company 

As the names imply, LLPs and LLCs are both legal entities that can limit personal liability for small-business owners. However, there are also notable differences between these two types of entities. 

Liability protection

Both structures protect individual owners from being held liable for any negligence or misconduct from their co-owners. A limited liability company also protects its owners, known as the members of an LLC, from personal liability for the business’s debts and obligations.In some states, this is also true for LLPs, but in other states, some or all of the partners in an LLC may be held liable for debts or obligations incurred by the overall partnership. 

Partnership

As a partnership, an LLP must involve at least two partners. An LLC typically has multiple members, but it can also be operated by a sole member. An individual can form an LLC on their own as a way to separate personal and professional finances. 

Legal status

Another difference between LLPs and LLCs is their legal status. In some states, there is no law regarding who can form an LLP or an LLC. But some state laws, including those in California and New York, only permit professional services firms to operate as an LLP. In other states, professional services firms are restricted from operating as LLCs. 

Limited liability partnership vs. limited partnership

A limited partnership is a type of business structure that involves at least one general partner and at least one limited partner. The general partners are responsible for day-to-day management of the partnership and assume unlimited liability for the partnership’s debts. The limited partners primarily provide financial backing, are removed from daily operations, and assume limited liability.

While a limited partnership involves multiple types of partners, a limited liability partnership involves only limited partners. Thus, all partners play an operational role and all assume only limited liability for the partnership. 

Limited liability partnership vs. general partnership

A general partnership is a basic arrangement in which two or more partners start a business together and agree to share all assets, profits, and liabilities. The general partners assume unlimited personal liability for the partnership, meaning their personal assets are not protected from potential seizure. 

This differs from LLPs, LLCs, and LPs, all of which provide limited liability to owners and partners. Because of this difference in liability, general partnerships tend to be small companies or even informal business arrangements, while larger companies and firms typically operate under some form of limited liability structure. 

LLPs vs other types of partnerships and business entities