A limited liability partnership is a business structure that provides the benefits of partnerships with safeguards to protect personal assets. Unlike general partnerships, in which partners are liable for the actions or debts of the other partners, a limited liability partnership protects each partner’s assets by keeping personal liabilities separate.
For instance, if one partner is sued, they cannot be held liable for another partner’s debts or actions. Each partner maintains their personal property and assets while also having the ability to own property and assets as a partner jointly.
Limited liability partnerships have advantages over general partnerships and other business structures such as sole proprietorships or corporations. The most significant advantage of a limited liability partnership is its protection from personal liability for any other partner’s actions or debt. A limited liability partnership has some clear benefits but also some drawbacks. Here’s what you should know before making this decision:
What is a limited liability partnership?
A limited liability partnership is a business partnership with limited liability for the other partners’ actions, debts, or financial obligations. In other words, it’s a legal structure that protects the partnership members from being held personally responsible for the debts and obligations of the business.
Partners in an LLP are generally not responsible for the business’s debts if they are not contractually obligated to be responsible for those debts. This is referred to as “limited liability,” which means the partners have limited responsibility for the business’s debts.
Benefits of a limited liability partnership
Limited liability partnerships offer several benefits to business owners. These benefits include:
Limited Liability Protection for Partners
Because a limited liability partnership separates each partner’s assets from the partnership assets, it offers protection from liability for the actions and debts of other partners. This protection from personal liability is significant in the case of a lawsuit because partners in a limited liability partnership can continue to operate their business while the plaintiff is seeking payment.
It helps protect a partner’s assets, such as their home, savings, or retirement funds, from being seized to satisfy a debt.
Ease of formation
Partners in a general partnership are automatically liable for all the partnership debts and can be sued for those debts. On the other hand, partners in a limited liability partnership are not automatically liable for the partnership’s debts.
This means it is easier to form a limited liability partnership than a general one since partners do not have to sign a contract or execute documents to be liable for each other’s actions.
The ease of formation for a limited liability partnership makes it a good choice for start-up partnerships since there is less paperwork and legal documentation than in other business structures such as corporations. You can also setup LLP online through third-party service providers.
Continuity of partnership
Partners in a general partnership, if one dies, can be bought out, or if one becomes incapacitated, can dissolve the business. However, partners in a limited liability partnership are indefinitely bound to the partnership.
Partners in a general partnership can dissolve the partnership by selling their interest in it or buying out the other partners. However, partners in a limited liability partnership cannot buy out one another; they remain bound to the partnership until they decide to dissolve it.
Pass-through taxation
Partners in a general partnership are taxed on the partnership’s income, the same as corporations. The income is taxed at the business level before it is distributed to partners. However, partners in a limited liability partnership are taxed on the partnership’s income at the individual partner level.
This means that the partnership profits are distributed to the partners, who then pay taxes on the profits as if they earned them directly. This is the same as sole proprietorships, where the profits are taxed individually.
Flexibility in decision and exit strategy
Partners in a general partnership are bound by their partnership agreement and state law regarding how decisions are reached and when partners can exit the business. However, partners in a limited liability partnership have more flexibility in decision-making and when partners can leave the business if their partnership agreement allows it.
A partnership agreement can include the rules and regulations for reaching decisions; however, the partnership agreement cannot contradict state law. This means that partners in a limited liability partnership are subject to state law while having their terms in the partnership agreement.
Drawbacks of a limited liability partnership
While there are many advantages to forming an LLP, there are also some drawbacks. This include:
- Cost: With any business structure, you’ll have to pay to form it. The cost to form an LLC varies depending on where you live and what services are available in your area. You may have to hire an attorney or accountant to help you form your LLP. You may also have to pay a filing fee.
- Formality: Owners of an LL P must meet specific standards. You must follow certain formalities in managing your business, such as keeping accurate books and records. Your business could be subject to fines and penalties if you don’t meet the requirements.
- Complexity: Partners in an LLP don’t have the same protections as partners in a general partnership. In a general partnership, the partners have joint liability for all the debts and obligations of the partnership.
Conclusion
When you own a business, you must choose how you structure your organization. There are several business structures that can help protect your assets while allowing you to operate as an independent business owner—one of the most common and advantageous. An LLP provides many benefits but also has several drawbacks worth considering.