Limited Liability Partnership: Advantages and Disadvantages

limited liability partnership

Partnerships are a common occurrence in the business world. After years of working together, or serving different roles within the same industry, it is not unusual for two or more people to go into business together. On paper, this sort of arrangement makes a lot of sense. For one, a partnership allows you to lean on the expertise of others as you work to shape and grow a business. For another, it enables you to share some of the financial risks involved in entrepreneurship. Sometimes, a general partnership is too limiting, and a business may opt for something more legally sound. In such a case, a limited liability partnership (LLP) may be a logical business structure.

Like anything in life and business, there are advantages and disadvantages to limited liability partnerships. Before you opt to form an LLP, a limited liability company (LLC), or form a corporation, you are going to want to understand their drawbacks. It is also, generally speaking, a wise idea to learn your state’s particular laws on forming an LLP, as they are not available to everyone in all states. 

limited liability partnership

The Benefits of Forming a Limited Liability Partnership

To be frank, a limited liability partnership is not a match for every type of business. Additionally, they are only currently available in 40 states. Your first order of business when considering forming an LLP should be to consult with your state’s individual requirements. 

LLPs are popular among business owners because they create what is called “limited liability.” This means that the personal assets of individual partners are shielded from the liabilities incurred by the business. Most often, this is directly related to debts and lawsuits. An LLP does allow for liability for individual partners, provided they demonstrate provable negligence, while shielding other owners of the business.

This structure of liability, one that can account for the errors of one partner while preserving the overall business, makes LLPs popular among certain types of professionals. Lawyers, doctors, dentists, accountants, and architects often favor the formation of LLPs. In some states, such as Nevada and California, licensed professionals are prohibited from creating LLCs and most set up LLPs instead.

There are also tax benefits that come with limited liability partnerships. An LLP is a legal entity that is deemed as “pass-through” by the Internal Revenue Service (IRS). What that means is that the income made by the business itself is not taxed. Rather, it “passes through” to individual partners, who then pay taxes on their own income. This is unique from some corporate structures, which can essentially find themselves taxed twice.

The Drawbacks of an LLP for Your Business

Of course, there is no business structure that is without its downsides. These one-size-fits-all formats can present challenges for even the most well-designed business. One of the biggest drawbacks to forming an LLP is that the cost to insure your business can be substantial. Since each partner can be found liable after an adverse event, they will need to carry individual malpractice insurance. On top of that, the business itself will have to carry a rather comprehensive insurance policy for the unexpected. 

LLPs also do not have uniform laws and rules from state to state. As previously mentioned, they are not available everywhere, and different states will have different policies regarding their formation. An LLP also requires you to have at least one partner, as its name would suggest. If you are committed to forging your own path in the business world, an LLP or LLC is likely not the right fit for you. 

Form an LLP Today with Our Help

If you have weighed the pro’s and con’s of forming an LLP and decided to move forward with creating such a structure, you will find yourself facing a barrage of paperwork. You will need to file the appropriate document with your local Secretary of State office, and there may be supplemental documentation to draft as well. Before you get to that stage, however, you may want to consult with a tax attorney. A seasoned legal mind can help you make a more informed decision about what is right for you and your business.

If the prospect of completing all of the paperwork necessary to form an LLP seems daunting, the Corporation Center can help. Take a minute or two to browse the navigation panel on the left-hand side of our site. You will find a list of all 50 states, each one, when clicked upon, hosting several convenient online forms. We utilize an SSL-encrypted web portal and easy-to-fill forms that allow you to file your LLP registration in a matter of mere minutes. To learn more about what we can do for you and your business needs, contact one of our helpful customer service representatives today.