Entrepreneurs can choose from several legal structures for their businesses. Corporations, general partnerships, limited liability companies, and limited liability partnerships are all options you can choose from. A limited liability partnership, or LLP, will be the subject of this guide. Read more before you go for llp incorporation online.
What is an LLP?
There are at least two business partners in a limited liability partnership (LLP). Limited liability means each business partner is not fully responsible for the company’s debts or liabilities. The partners in an LLP aren’t responsible for the negligence or malpractice of one another – they are responsible for their own negligence.
Benefits of Limited Liability Partnerships
In the event of a lawsuit against an LLP, each partner’s personal assets are 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.
There are challenges involved in managing an LLP. In the event of a lawsuit against an LLP, even though each partner’s personal assets would be protected, the partnership’s assets could be lost. It’s possible for the partner at fault or negligent to be held personally liable for their actions, even if the partnership would be the target of a lawsuit. The turnover of members is another factor to consider. In the event of a partner leaving a two-party LLP, the company may have to dissolve.
Examples of Limited Liability Partnerships
Lawyers, accountants, and doctors are common types of businesses that become LLPs because they involve multiple partners. As well as the guidelines for starting an LLP, the amount of limitation varies by state (for example, here is the Massachusetts LLP information).
Limited Partnership
Limited partnerships (LPs) are legal partnerships between at least two partners – a general partner and a limited partner. The general partner is responsible for making business decisions. As a general partner, you are personally liable for the partnership’s debts, while the limited partner has liability protection.
Pros and Cons of a Limited Partnership
Pros
Partnership income is not taxed at the corporate level under pass-through taxation. On the partner’s personal tax return, all profits and losses are reported.
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
In an LLP, the limited partners are protected from personal liability, while in an LP, only the general partners are. Partners in an LLP are protected from the negligence of their fellow partners due to limited liability.
In an LP, only the general partners have the power to make operational and business decisions, unlike in an LLP.
LLP vs. LLC
In LLPs and LLCs, business owners are limited in their liability or responsibility for the debts of their companies. In an LLC, there can be as few as one partner, while in an LLP, there must be at least two partners. A limited liability company can be taxed as a corporation or partnership, while a limited liability partnership is taxed as a partnership.
There is a difference between a limited liability partnership and a limited liability company, despite their similar sounding names. An LLC has a number of key elements, which we’ll discuss below.
Limited Liability Company
An LLC is a legal entity that can have more than one owner and has characteristics of both a corporation and a partnership. Members of the company are also known as owners, and they aren’t personally liable for its liabilities or debts. There is no limit to how many members an LLC can have.
Imagine Maria and Scott are partners in a bike business. Customers were injured when one of their bike models malfunctioned. Maria & Scott’s Bicycles operates as an LLC, so they would not be personally liable for the injuries.
Pros and Cons of a Limited Liability Company
Pros
Double taxation is prevented by passing-through taxes, which are taxes paid by the business and paid by the 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.
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.
Read more
Limited Liability Partnership: Frequently Asked Questions
Procedure for LLP registration in India: Step-by-step process