Business Law

A Limited Liability Partnership Distributes Accountability

Reviewed by Diana Fitzpatrick, J.D., NYU School of Law
A limited liability partnership is a special type of partnership that provides personal liability protection to all the partners.

A business partnership is a flexible way for two or more people to go into business together. While the benefits of operating as a partnership can be significant, there are drawbacks that make the partnership structure a problem for people who worry about having to use personal assets to pay for business obligations. The limited liability partnership (LLP) is a special type of partnership that provides personal liability protection to all the partners. It should not be confused with limited partnerships or limited liability companies, which are different types of business structures.

LLPs Formed Under State Law

An LLP is a special type of general partnership that you must register with the state. However, states differ in how they treat LLPs. Some states restrict the use of the LLP structure to professionals, such as lawyers and accountants. In states that restrict the use of LLPs, you and your partners must be licensed members of an approved profession before you can set up your business as an LLP. Other states, like New Jersey and Vermont, don't limit LLPs to professionals but restrict the amount of liability protection that the LLP provides its partners.

Limited Liability for Partners

All partners in an LLP enjoy limited liability from business obligations and wrongdoing by the other partners. This is particularly important for professionals so that one professional in the partnership is not held responsible for malpractice committed by another partner. Creditors are limited to the assets of the business and cannot pursue the personal assets of the partners. Partners remain liable for debts and obligations resulting from their own negligence, malpractice, or misconduct.

All Partners Help Manage the Business

In a limited partnership, partners with limited liability cannot help manage the business. To keep their liability shields, their involvement with the business must be as a passive investor. The LLP business structure, by comparison, gives all partners limited liability while allowing them all to manage the business in the same way as if they were general partners in a partnership.

Limited Liability Partnerships Do Not Pay Business Taxes

Like other types of partnerships, an LLP is not a tax-paying entity. It reports its business activity to the Internal Revenue Service, but does not pay taxes as a business. An LLP passes its profits and losses through to its partners in proportion to their percentage shares in the business. The partners then pay taxes on their shares of the business at the individual tax rate. One of the reasons why the LLP business structure became available is to allow professionals to take advantage of limited liability protection without having to change the company's tax status.

A Business Lawyer Can Help

The law surrounding creation of a limited liability partnership is complicated. Plus, the facts of each case are unique. This article provides a brief, general introduction to the topic. For more detailed, specific information, please contact a business law attorney.

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