Limited Liability Partnerships (LLPs) Under the Law

Much like limited partnerships, limited liability partnerships (often known by the acronym LLP) are an alternative to general partnerships that allows business owners to limit their personal liability for the debts and financial decisions of their business. This is a significant protection for those involved in new business formation, since it gives the peace of mind that one will not be risking personal assets, such as a home, savings fund, or retirement, for the benefit of the business.

Forming a Limited Liability Partnership

Limited liability partnerships are a common business organization form for many types of professionals who may find their businesses threatened by lawsuits on the basis of professional negligence or malpractice. Thus, many groups of lawyers, doctors, accountants, and other professional groups use limited liability partnerships as a preferred type of business structure.

Most states now recognize the creation of limited liability partnerships, but many have imposed special requirements for the creation of this type of business organization. For instance, some states only allow limited liability partnerships for certain types of credentialed professionals, such as doctors, while others allow any group of business owners to form a limited liability partnership. Additionally, most states require partners to file a formal registration of an LLP with all necessary state agencies, and to include the designation “LLP” in the business name so that others, including clients, are aware that the partnership has limited liability. Finally, in some states, members of LLPs are required to carry professional negligence or malpractice insurance in lieu of having personal liability for the debts of the partnership, or to post a bond that can be used if liability concerns later arise.

Limited Partnerships versus Limited Liability Partnerships

Limited liability partnerships are similar to limited partnerships, but they do not require the presence of a general partner. In limited partnerships, there must be at least one business owner who serves as a general partner, taking a primary role in the oversight of the company and remaining personally liable for the debts of the business. By contrast, in a limited liability partnership, all business owners are limited partners, and there is no general partner. Instead, the limited partners jointly manage the partnership, and each has only limited liability for the debts of the business. In most situations, none of the limited partners will be personally liable for claims against the partnership.

While limited liability partnerships are appealing because they reduce the risk and exposure for limited partners, it is important to note that the creation of a limited liability partnership does not make a partner immune from responsibility for decisions that he or she makes that negatively affect the partnership. Limited liability status does not protect a partner from liability for intentional misconduct or wrongdoing, such as fraud or embezzlement. It only insulates partners from exposing their personal assets to the claims of business creditors.

Advantages of an LLP

There are several advantages to creating a limited liability partnership rather than a limited partnership. First, as with limited partners in a limited partnership, partners in an LLP are not required to take employment taxes out of the profits they receive from the partnership. However, unlike in a limited partnership, limited partners in an LLP are entitled to be more involved in the management affairs of the partnership because there is no overarching general partner with primary control for the business. Thus, for some, a limited liability partnership is the best of both worlds.

Last reviewed October 2024