Limited Liability Partnerships
- How It's Taxed
A limited liability partnership (LLP) is a general partnership that has registered with the Secretary of State.
Some state statutes restrict an LLP to certain limited types of professional practices. These often include such professions as public accountancy, architecture, law, or medicine. All partners must be licensed, registered, or authorized to practice in the specified professions.
Like members in an LLC, partners, as such, are not held personally responsible for business debts and liabilities of the LLP. However, a partner may still be held liable for personally participating in the actions that created the liability for the LLP. The LLP form protects the other partners whose actions were not involved.
An LLP and/or its partners are generally required to provide insurance coverage or other adequate security to cover damages caused by the malpractice of the LLP or its partners.
No income tax is paid by the LLP as an entity. Profits and losses are reported on the partners’ tax returns, and any tax due on business income is paid at the individual level.
An LLP is typically subject to any state franchise taxes for the privilege of operating as a limited liability entity.
Forming an LLP generally requires filing a registration form with the Secretary of State.
The partners will generally enter into a partnership agreement to define the rights and obligations of the partners, how distributions of profits and losses will be handled, any restrictions on transfers of partnership interests, and similar important matters that are generally not adequately covered in state LLP statutes.
A LLP is a good alternative to a general partnership to overcome the unlimited personal liability of a general partner for the liabilities of the partnership regardless of their involvement in the activity causing the liability. The LLP offers protection to a general partner’s personal assets in an LLP if the partner had no involvement in the activity that caused the LLP to be liable.
For a general partnership or limited partnership already in existence with a written agreement, it is easy to convert to a LLP and involves less expense than forming a corporation.
A LLP is a separate legal entity. It may sue in its own name, own property, raise capital by selling interests in the LLP, and continue to exist notwithstanding the death of a partner.
An LLP is managed solely by the general partners. State laws will define certain rights of LLP partners and limitations on the powers of a partner, but most of these determinations are left to the decision of the partners as expressed in a written partnership agreement.
How It’s Taxed
No income tax is paid by the LLP as an entity. Profits and losses are passed through to the partners in proportion to their partnership interests and reported on each partner’s tax return, and any tax due on business income is paid at the individual level. However, an LLP is typically is subject to any state franchise taxes for the privilege of operating as a limited liability entity.
What is a Limited Liability Partnership?
A Limited Liability Partnership (LLP) is a partnership in which a partner’s personal assets are shielded from claims of malpractice, negligence, or other wrongful acts committed by other partners or employees of the LLP, so long as the partner didn’t participate in or supervise any of the wrongful acts.
Can anyone form a LLP?
In most states, yes. However, in some states the LLP entity is restricted to certain licensed professionals such as attorneys and accountants and may also include architects, medical professionals and a few other specified licensed professions.
How is a LLP formed?
While a LLP is recognized as a separate legal entity, it is more accurately a procedure for registering an existing limited partnership or general partnership to be treated as a LLP. An LLP is created at the state level by filing a Certificate of Registration or similar document and paying a filing fee. The Certificate must list the LLP name with one of the required endings indicating it’s an LLP, and generally must also designate a person or authorized company to act as the registered agent.
Is a LLP required to have a written partnership agreement?
This is often one of the requirements contained in state statutes, but even if not required, it is always prudent to have a personalized agreement among the partners describing their respective rights and obligations.
Is a LLP subject to any other requirements?
Some state statutes, particularly those that limit the formation of a LLP to certain licensed professionals, require that the LLP maintain a minimum net worth, post a bond, or provide evidence of malpractice or liability insurance coverage to remain in good standing as a LLP. Even in states where a LLP is not restricted to designated professionals, evidence of liability insurance may be required as a condition for registration.
Can an existing general partnership or limited partnership become a LLP?
Yes. The LLP registration is really a process for creating a LLP for an existing general or limited partnership. Most states have a procedure for an existing general or limited partnership to vote to become a LLP and thereafter file a Certificate of Registration to convert to the LLP form.
Does a general partner still have unlimited personal liability in a LLP?
Changing from a general partnership to a LLP changes the unlimited personal liability of general partners. The unlimited personal liability will only apply if a partner’s own wrongful act was responsible for causing, or contributing to, damage or injury to a third party. A general partner will not have personal liability in a LLP for damages or injuries caused by wrongful conduct of other partners or employees of the LLP, though the assets of the LLP itself will be at risk, including contributions made by a general partner who otherwise has no personal liability.
Is a LLP subject to federal or state income tax?
No. A LLP is treated as a “pass-through” tax entity like other partnerships so that profits and losses flow through to the individual partners who report their share on their personal tax returns and pay tax due at individual tax rates.
As a limited liability entity, a LLP is often subject to a state “franchise tax” that may be in a fixed annual amount or a calculated amount based on income, assets, or other factors.