Are you considering starting a business of your own? Maybe you have a great idea for a product, or it is just time to venture out on your own with your professional services. No matter what has sparked your entrepreneurial urge, the road to getting your business up and running can be long and arduous. You are going to need to resign yourself to spending a lot of evenings and weekends taking care of details both large and small alike. Of course, there is also an element of risk inherent to entrepreneurship, and that risk is enough to scare many would-be business owners off from the prospect. One way in which you might think about mitigating such adversity is to form a limited liability partnership (LLP). By forming a partnership, you can go into business with like-minded individuals–maybe they are colleagues, friends, or family members–and lean on their knowledge and expertise. This can be especially beneficial if you and your partners all bring different strengths to the table.
You may be wondering, in the business world, what constitutes a partnership? Well, there are different levels and layers to the concept of working with a partner. The most basic version of this concept is the general partnership (GP). This technically occurs any time two or more people venture into a business together. A GP does not require any formal paperwork, and it can sometimes be consummated with a handshake or verbal agreement. Some GPs will opt to draft a profit-sharing agreement, so as to give themselves a bit more protection and legality. A limited liability partnership is essentially an extension of a GP, though with a few more layers, and for individuals in certain professions, they can make a lot of sense.
What is a Limited Liability Partnership?
There are a number of different ways in which you can legally structure a business. For certain smaller operations, a sole proprietorship will suffice. Others will opt to form a limited liability company (LLC). For organizations focused on growth, a corporate structure can be a logical choice. When deciding what is right for your business, it is important to think about your goals and concerns. For instance, if you are looking to keep your tax liability low, an LLC or LLP may be a sound choice.
An LLP essentially separates your business as its own legal entity. Very similar to an LLC, you can create an LLP relatively easily, and there is not much required in the way of maintenance. Your annual reporting requirements for an LLP will vary depending on your state, and it is worth noting that LLPs are not available everywhere. One key draw to creating an LLP is that it grants you and your partners the protection of limited liability. This means that in the event your organization is sued or faces bankruptcy, the partners will be able to shield their personal assets from any legal action. To put it in more simple terms, you will not need to worry about losing your home or 401k in the event that your business is sued. While this protection is offered similarly in an LLC, the difference here is that in an LLP, a negligent partner can be found liable. As an example, if one doctor in a medical practice commits some sort of malfeasance, it will not bring down the whole business if they are found liable.
This sort of targeted accountability system makes LLPs uniquely appealing to licensed professionals. Physicians, attorneys, architects, and accountants tend to favor the LLP as a business structure. In Nevada and California, licensed professionals are only allowed to create LLPs, and are precluded from other structures.
In an LLP, you will also benefit from “flow-through” status with the Internal Revenue Service (IRS). With this designation, profits earned by your business are not subject to taxation until they pass through to the individual partners, who will then pay personal income taxes. This structure, in a sense, allows you to circumvent “double” taxation.
Forming Your LLP Online
Again, the rules vary a bit from state to state, but in general, there is a process to go about when forming an LLP. You will first need to select a name–most states require you to choose a name that is not already registered. You should then designate a registered agent. The role of that individual is to receive all legal correspondence on behalf of your business. Then, it is time to file your articles of organization. This document should include some basic information about your business and the partners involved and is typically processed by your Secretary of State’s office.
At Corporation Center, we can help you process your LLP paperwork online. Simply select your state from our side navigation and you will be brought to an easy-to-fill web form. To learn more, check out our Frequently Asked Questions page, or visit our site.