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.

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What Is an LLP?

An 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. And 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.

If the partnership were to be sued, the personal assets of each partner would be protected, but the assets in the partnership could be lost. The partnership would be the target of a lawsuit -- however, the partner who's at fault or was negligent could be personally liable for their actions.

Each partner in a limited liability partnership has a say in the operation and management of the business. The LLP agreement also allows partners to leave the partnership and new partners to be added.

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.

Limited partnerships come with advantages like pass-through taxation, personal asset protection, and the flexibility to add more limited partners.

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.

Some advantages of a limited liability company include:

  • Pass-through taxes: This means that the business' taxes are passed to the individual partners.
  • 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.

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.

A disadvantage of a limited liability company is that 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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Originally published Dec 6, 2018 8:30:00 AM, updated December 06 2018