Going into business on your own can be a daunting experience. The time commitment is significant, and the financial investment involved is often considerable. Not to mention, there can be a sizable level of uncertainty about when your business will start to turn a profit. Walking away from a guaranteed paycheck for a chance to build your own empire simply is not for everyone. With this in mind, it is not unusual for ambitious entrepreneurs to seek out like-minded partners as they aim to build a business. When this occurs, particularly with licensed professionals, forming a limited liability partnership (LLP) can make a lot of sense.
In any partnership in the business world, the level of risk that is taken on at the individual level can be mitigated. By sharing responsibilities with one or more partners, you may find yourself better able to focus on your own strengths and apply them to your business. Read on to learn what is the meaning of a limited liability partnership, and allow yourself to make a more informed decision about whether or not it is right for your organization.
Taking a Business Partnership to a New Level
In a very basic sense, it is helpful to think of an LLP as a logical evolution for a general partnership. In the business world, a general partnership occurs whenever two or more individuals form a joint business venture. General partnerships can be informal, often based around a verbal or handshake agreement. They can also be a bit more official–in some cases, drafting a legal profit-sharing agreement can be a prudent maneuver.
While in some lines of work, a simple agreement between partners is enough to build and grow a business, it is not without its potential downsides. The biggest inherent risk is that of liability. Businesses of all shapes and sizes can find themselves vulnerable to bankruptcy or lawsuits. With no structure in-place to defray liability, the actions of one partner can be financially ruinous to the other owners of the business.
What is a Limited Liability Partnership?
As its name would indicate, a central tenet of an LLP is the concept of limited liability. In this legal entity, it is established that liability can only occur at the individual level. In other words, if one partner–say, in a medical practice–is found liable for malpractice, the other partners and, more importantly, the business itself can be shielded from liability.
Because of their structure and robust liability protections, LLPs are fairly common among licensed professionals. Lawyers, accountants, architects, doctors, dentists, and more will favor LLPs when they create firms. Depending on the industry, all partners should still carry their own malpractice insurance, but still, their business as a whole will face a much lower risk. In California and Nevada, any licensed professionals are precluded from being able to form limited liability companies (LLCs) and must instead opt for LLPs.
The Tax Benefits of a Limited Liability Partnership
LLCs, LLPs, corporations, and sole proprietorships all have structural nuances of their own. The way that you choose to organize your business should depend on a multitude of factors. One important consideration that you will want to make pertains to how your business will be taxed.
The Internal Revenue Service (IRS) deems LLPs to be “pass-through” entities. What that means is that the income generated by the business itself is not taxed. Rather, it “passes through” to the members of the business, who then pay income tax on an individual level. This concept also applies to limited liability companies. Because of this tax incentive, LLCs and LLPs are very popular among business owners.
Corporations, on the other hand, can find themselves essentially taxed twice. Once for the profits of the business, as well as for the salaries of the owners. There are, of course, other positives to forming a corporation, so regardless, you will want to do your own due diligence. It can be particularly helpful to consult with a seasoned tax attorney in the early days of forming your business.
Start Forming Your LLP Today with Our Help
If you and your business partners are interested in setting up your own firm, you may find that an LLP is the best fit for you. LLPs are not available in all states, and while each jurisdiction will have its own rules regarding their formation, in general, you will have to go through the process of submitting a registration document to your Secretary of State’s office.
Instead of navigating the time-consuming process of printing out forms and going down to the post office, why not work with us at the Corporation Center? We are a private service that specializes in helping business owners form LLPs and LLCs online in all 50 states. To learn more, contact us today.
