What's an LLP? Limited Liability Partnerships Explained in Under 5 Minutes

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.

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.

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.

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.