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Limited Liability Partnership
A Limited Liability Partnership continues to expand the characteristics of an unincorporated partnership even closer to those of a more formally structured corporate entity because the LLP is recognized as a separate legal entity from the individual partners. As a result, this type of organizational structure provides certain degrees of limited liability to General Partners, especially related to negligence claims.
Advantages of a Limited Liability Partnership
- An LLP is a separate legal entity
- LLPs may own property and sue/be sued
- Liability Protection for all General Partners from claims against the LLP
- Liability Protection for the LLP from claims against a General Partner
- Partner dividends are reported on the partners’ personal tax returns
- No date of termination is required in the Partnership Agreement
The primary advantage for an LLP is that it establishes a separate legal entity from that of the general partners. As such, an LLP may own property as well as sue and be sued in a legal arena. By far the most beneficial aspect of separate legal status is the limited liability protection it provides. First, General Partners are proteced from claims against the LLP. Within the industries of certain professions, including lawyers, accountants, and architects, the separate legal status of the LLP provides a certain degree of protection for the personal assets of the general partners against seizure resulting from litigation against the LLP. For example, if a law firm is sued and a judgment is awarded, the personal assets (including checking/savings accounts, automobiles, and even homes) of the individual partners are protected. Conversely, the status of separate legal entity of an LLP protects the assests of the LLP from claims against one of the General Partners. For example, if one of the lawyers in an LLP law firm is sued and a judgment is awarded, the collective assets of the LLP are protected. In addition, the taxation of an LLP is simplified because the income dividends that the partners receive are reported on the partners’ individual tax returns (IRS Form 1040). An additional advantage to forming an LLP is that no date of termination is required in the Partnership Agreement, something that is required in other types of organizational business structures that is not appropriate for the long-term types of partnerships typically structured by LLPs.
Disadvantages of a Limited Liability Partnership
- Extensive legal documentation required
- Termination of partnership due to withdrawal of one or more partners
- Business entity limited to certain professions
Because of the separate legal status granted to an LLP, there is an extensive amount of legal paperwork that must be generated and filed. In addition, an LLP is only as strong as the commitment of its partners, and in the case of one or more partners withdrawing, the partnership is terminated. Finally, the most significant disadvantage of an LLP is that it is an organizational structure that is limited to certain professions such as lawyers, accountants, and architects.
Recommendations for a Limited Liability Partnership
Because some states restrict certain professions such as lawyers, accountants, and architects from incorporating, LLPs are ideal for professional partnerships such as lawyers, accountants, and architects where the partners desire a formal organizational business structure that establishes a separate legal entity which provides them with a limited amount of liability protection.
Formation of a Limited Liability Partnership
In order to establish a Limited Liability Partnership, there are various registration statements required by individual State statues. Fortunately, it is not necessary to enter into a new Partnership Agreement or establish a new Partnership when electing the benefits of LLP status. However, Partnerships which choose LLP status should review their Partnership Agreements and make any necessary changes to allocate the business risks appropriately among the Partners.