Professionals considering forming a business entity to protect their personal assets may consider a limited liability partnership as an option. An LLP is one type of business entity for multiple parties going into business together, allowing them to pool their talents and resources in an effort to grow more quickly than they might alone. And while an LLP is an entity that offers benefits to its partners, it isn’t necessarily available to all.
What is an LLP?
Limited liability partnerships serve a similar function to other business entities, allowing the individual partners involved to shield their personal financial assets and bank accounts from the business debts and obligations they accrue. LLPs differ from other entities in who can make use of it as a business structure; in many states, LLPs are only available to a set list of licensed professions, such as lawyers, architects, and accountants.
How do you form an LLP?
Once you believe that an LLP is the right entity for you and your partners, follow these steps for LLP setup, including registering with the appropriate state agency.
1. Determine your eligibility
- The first step is ensuring that you’re eligible to establish an LLP under the guidelines set by your state regarding qualified professions. Some states are very specific about which professions may set up an LPP and others do not place any limitations.
2. Choose a name and complete a business name check
- Once you’ve determined eligibility, you’ll need to find a business name for your LLP to use as a “doing business as” (DBA) name. It’s a good idea to pick a name that won’t run afoul of any existing trademarks by doing a check of state and federal records. Also, in various states for some professions, there are rules about whether you can use DBAs that do not include the professional surnames in the business name.
3. Select a registered agent
- Similar to other business entities, your LLP will need a registered agent on record with the state to accept legal documents on behalf of the entity. You can select one of the partners, or choose a business lawyer or agent service to fill that role.
4. Create a limited liability partnership agreement
- While many states don’t mandate an LLP agreement, it’s a good idea to craft one with a lawyer to avoid conflicts during the partnership or as one or more partners may wish to depart or dissolve the LLP.
5. File the necessary paperwork with the state
- A crucial step in the process is filing a Certificate of Limited Liability Partnership with the state, often with the Secretary of State. It’s not as detailed as a partnership agreement, but provides the state with the name and address of the business and the name and contact info of the partners and the registered agent, as well as other relevant details. Filing the certificate may come with associated filing fees.
- You will also need to register for an employer identification number (EIN) by filing an IRS Form SS-4. Some states also require you to register a state ID number; make sure to check for this and file if needed.
- There are often certain permits and business licenses needed, depending on federal, state, and local laws. Check out the U.S. Small Business Administration database to see which permits you need.
Benefits of an LLP
An LLP provides a number of advantages for business owners. In addition to liability protection, LLPs offer a more flexible management structure, allowing the partners to choose how they wish to manage day-to-day operations, without worrying about a board of directors or shareholder formalities.
LLPs also allow partners to pass business income and loss directly through to their personal income tax returns, without any corporate tax payments. This avoids the issue of ‘double taxation’ that corporations frequently have to deal with, which is when personal taxes are levied on income or dividends received by individuals from the company, after the business has already paid corporate income taxes.
Those starting with a general partnership and looking for greater protection against the liabilities of the business may also have an easier time converting to an LLP than to other types of business entities. Although it’s worth checking how limited the limited liability guidelines operate in your particular state.
Costs and disadvantages of an LLP
While LLPs offer considerable benefits and advantages, there are several disadvantages and costs that are worth considering before making a decision. To start, the limitations on who can form the LLP, as well as differences in state laws regarding the liability of partners in certain instances. There’s also practical questions about the ability to run a business as a team; you’ll want to consider:
- What happens in cases of disagreement when no one is willing to budge?
- Who would leave if there is a breakdown in the relationship?
If the LLP had to be dissolved, that could be problematic and expensive.
LLPs also come with ongoing costs. Depending on the state, LLPs may be subject to annual registration fees, reporting, and franchise taxes. Given that many of those forming LLPs are from professions requiring a license, there is also the expense of liability or malpractice insurance to account for, as well as other insurance associated with running any type of business. None of these costs are necessarily prohibitive to forming an LLP, or even starting up a business, but they are worth knowing about before you begin.
What’s the difference between the LLP and LLC?
Given the similarities in the acronyms, you might assume that LLPs are similar in most regards to a limited liability company (LLC). And while there are commonalities, each differs in important ways. While LLCs can have multiple members, they can also be single person entities, whereas LLPs are, by definition, partnerships of two or more people. LLCs also have more flexibility for tax purposes, allowing its members to choose pass-through taxation to their personal tax returns or taxation within the LLC as a corporation. In contrast, LLPs are restricted to pass-through taxation, regardless of the partners’ preference. LLCs can similarly choose between a member-managed model or having a manager run the business, while LLPs are managed by the partners in some division of responsibility.
How LegalShield can help you set up a business entity
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