What to Know About Limited Liability Partnerships and Taxes?

Limited Liability Partnerships

Starting your own business is an inherently risky endeavor. Sure, you may have a rock-solid business plan and an in-depth knowledge of your consumer base, but you cannot always account for the unexpected. While you of course have your own years, or even decades of professional experience to rely on in your entrepreneurial efforts, it may be beneficial to enter your business with a partner. By creating an enterprise with a partner who shares your goals and expertise, you can not only mitigate some elements of risk, but you can also use your combined brain power to grow your business to new heights. If this sounds appealing to you, it is worth getting to know the concept of the Limited Liability Partnership (LLP), as well as the tax implications that come with it.

In the business world, a General Partnership (GP) occurs any time two or more individuals go into business together. A GP is often a somewhat informal arrangement, sometimes settled with a handshake or verbal agreement, though some do opt to draft written profit-sharing arrangements. An LLP, in a way, is a version of a General Partnership that adds a layer of limited liability protection. Read on to learn more about this business structure and how its tax incentives can improve your business’s bottom line.

Why Consider a Limited Liability Partnership?

If you have spent any amount of time in the business or professional world, you have likely noticed the letters “LLC” following the names of certain organizations. That abbreviation denotes a Limited Liability Company, which is not dissimilar from a Limited Liability Partnership. The key difference is that LLPs are not available in all 50 states, unlike LLCs. While they both employ the protection of “limited liability”, an LLP does allow for more focused accountability.

To put it in simpler terms, if one partner in your business commits negligence or fraud, they can be found financially liable, while the other partners are able to shield their personal assets–hence, limited liability. This business structure makes a lot of sense for licensed professionals, and in some states, such as Nevada and California, such individuals can only form LLPs. Doctors, attorneys, dentists, therapists, and architects are often beneficiaries of this legal structure.

How Is an LLP Taxed?

When deciding on a legal structure for your business, it is important to consider the tax implications involved. An LLP, just like an LLC, enjoys pass-through status with the Internal Revenue Service (IRS). This means that revenue and profits generated directly from your business are not subject to taxation until they “pass-through” to the individual partners, who then pay taxes on their personal income or salaries. This comes in contrast to certain types of corporate structures, which can effectively find themselves taxed “twice”.

Limited Liability Partnerships

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