What Is a Limited Liability Partnership (LLP)?

Kaitlin Edwards | Mar 16, 2024

What Is a Limited Liability Partnership (LLP)?

Choosing a structure that will work for you is one of the most important decisions you’ll make when establishing your business. You have several options available to you depending on the type of business you intend to run and how you’d like to distribute control and liability among the founding members of your business.

If you’re considering utilizing a limited liability partnership, there are a few things you need to consider.

What Is a Limited Liability Partnership?

A limited liability partnership is a business entity where two or more partners simultaneously work together but maintain separation from each other. A limited liability partnership structure can be highly advantageous for independent professionals who want to divide labor and share overhead costs by working together while still maintaining individual professional reputations.

How Does a Limited Liability Partnership Work?

A limited liability partnership essentially establishes that professionals and entrepreneurs working under the same roof are together but separate. While LLP partners work together, they separately manage their customers or clients and provide service according to their own training and standards.

Many limited partners will share a vision or philosophy, but no one has any control or managerial responsibility for each other unless a managing partner is appointed. Power and responsibility can be lateral, and a hierarchy doesn’t need to be.

Each partner has only personal liability. If a dissatisfied customer or client were to take legal action against someone in a limited liability partnership, they could not pursue a partner they did not work with. Their complaint or allegation could only be directed to the partner who provided them with a product or service, and the rest of the partnership members are shielded from the complaint.

Joint assets and individual or personal assets of partners are protected in the event of a lawsuit. The partnership is not responsible for paying damages, debts, or settlements due to a legal decision or debt collection against one partner. The affected partner is expected to handle the situation through their own funds or insurance.

Do Taxes Work With a Limited Liability Partnership?

A limited liability partnership will file taxes collectively, including self-employment taxes for each partner. Partners will report their share of the profits and personal losses on their tax returns. LLPs can be used as pass-through entities for taxation to separate each partner’s contributions and business debts.

Although LLPs don’t usually pay corporate taxes (like a C Corporation would), some states may still expect them to pay a franchise tax. You can check your state laws for more information.

Partners will individually report their earnings on a personal income tax return and pay taxes at the individual tax rate. Partners can take deductions for their personal investments into their business and proportionately share deductions for mutual expenses incurred from running a partnership, like rent on office spaces or shared advertising.

Even though a partnership doesn’t file a mutual tax return (to avoid double taxation), it must file a detailed tax report that shows all profits, losses, and expenses. This report is an important part of record keeping, and the IRS will use it to verify the returns filed by individuals in the partnership.

Everyone’s income and expenses must equal the total sum shown on the report. It’s important to be thorough with this report, as discrepancies can lead to an audit.

Do Limited Liability Partnerships Get 1099?

If you transact with a limited liability partnership, you must send them a 1099-MISC. If you’re in a limited liability partnership, you should expect to receive 1099-MISC forms from your clients or customers.

Which Types of Businesses Work Best in a Limited Liability Partnership Structure?

Limited liability partnership structures are often utilized where a business consists of several independent professionals working alongside each other in a highly regulated industry. An LLP allows professionals to come together without merging as a single entity.

General partners share decision-making abilities for choices that impact the whole business, like changes in location or advertising methods. If the LLP lists a managing partner in the operating agreement, the listed individual’s opinion will hold the most weight.

Some professionals are more likely to face lawsuits than others. Professionals who have to carry special insurance, such as malpractice insurance, need a way to separate their responsibility and liability from their colleagues.

Dental and medical professionals, accounting firms, law firms, real estate agencies, architects, dentists, and plastic surgeons often use a limited liability partnership when they open a shared firm or practice.

Since an LLP allows business owners to share the costs of maintaining a business together without sharing the liability for their partners’ practice, it’s an ideal arrangement.

LLP vs. LLC: What Is the Difference Between a Partnership and a Corporation?

At first glance, a limited liability company and a limited liability partnership might sound like very similar concepts. Both offer liability protection, and both can involve multiple key members making important decisions for the business.

The simplest way to explain the difference between a limited liability company and a limited liability partnership is that an LLC is together while an LLP is separate. An LLC acts more like a corporate marriage.

Everyone involved is inextricably linked under their umbrella of limited liability protection. An LLP acts more like a civil union. Your relationship with your partner is established, but you still operate independently.

There’s also a difference in membership requirements. LLCs can have multiple owners, but they don’t need to. A single person can establish an LLC and hire employees without giving them ownership of the company.

A limited liability partnership requires at least two people to share the responsibility. However, one person can be a more liable managing partner and sit below the managing partner on the hierarchy.

A difference between LLCs and LLPs that occasionally occurs is the duration of the business formation. Both structures can be renewed indefinitely for long-term business projects, but LLPs can also be used for temporary projects. For example, if family members inherit several properties, they can temporarily form an LLP to renovate and sell the real estate they inherited and easily release themselves from the LLP once a project is completed.

What Are the Pros and Cons of a Limited Liability Partnership?

A limited liability partnership can have many advantages, especially in states that allow license holders in your profession to utilize an LLP structure. There may be some drawbacks to choosing an LLP if you intend to move your practice at some point in the future or if you strongly prefer how you’d like to file your taxes.

Pro: Partnership Agreement

A limited liability partnership allows partners to be added or removed from the agreement. Many limited liability partnerships utilize an agreement that includes grounds for removing a partner. If things aren’t working out, removing and replacing a problematic partner is relatively easy without establishing a new business.

Pro: Protection for All Members

One of the most advantageous aspects of a limited liability partnership is the personal protection it provides between partners. The other partners are protected if one partner accrues a debt or is subject to a lawsuit for malpractice or negligence. Partners are only legally liable for themselves.

Pro: Only Two Partners Are Necessary

The term “partnership” implies involving multiple people, but you only need two partners to form a partnership. This allows you to keep your business tight-knit by working with a singular trusted associate rather than a large team. A two-partner LLP eliminates the potential for a “too many cooks in the kitchen” scenario.

Con: LLPs Are Less Portable

Limited liability partnerships aren’t available in some jurisdictions. You may not have the option to form an LLP in your state. If your partners mutually decide to relocate, you won’t be able to move your firm or practice to states that won’t recognize your business structure.

Con: Limited Liability Partnerships May Be Profession Restricted

In cases where LLPs are available, they may be restricted to certain professions. You may not be able to establish an LLP unless all partners have a specific license to practice a profession under the qualifying umbrella. States like New York and California strictly limit the availability of LLPs to a handful of industries.

Con: Limitations With Tax Treatment

Limited liability partnerships cannot file as an S corp for tax purposes like a limited liability company would. This limits the separation between partners and changes how profit sharing is approached. If you’d prefer to file taxes as an S corporation, an LLP may not be your best structure.

Maintaining Limited Liability Partnership Compliance with Mosey

Limited liability partnerships have special compliance concerns and registration requirements they must abide by to remain in good standing with local business authorities and the IRS. It’s important that every partner stays in the loop and that mutual tasks can easily and efficiently be streamlined. That’s where Mosey comes in.

Mosey’s automated compliance tools can help your LLP or small business stay on track with compliance concerns. Your partners can focus on running their practice while Mosey keeps track of important requirements in the background.

Schedule a demo with Mosey to learn how our tools can simplify your general partnerships.

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