What to Know about a Limited Liability Partnership

The limited liability partnership (LLP) is the oft-forgotten younger sibling of the more widely known limited partnership (LP), both being the descendants of the antiquated general partnership form. An LLP provides its partners with limited liability for the debts and liabilities of the partnership like members of an LLC, limited partners of an LP, or stockholders in a corporation. As with any partnership or an LLC, an aggrieved party can sue an LLP partner personally for that partner’s acts and omissions.

The LLP is used in organizing groups of professionals, such as law firms, doctors' offices, and accounting firms.  Often, attorneys, physicians, or accountants come together to share administrative, back office, and other resources to decrease expenses by avoiding duplicative efforts and structures. In addition, businesses in certain professions are not legally permitted to organize as LLCs, and the LLP form provides a similar alternative.

An LLP is governed just as any other general partnership under Delaware law and is taxed on the same pass-through basis as a general partnership, limited partnership, or LLC (except where an LLC elects different taxation such as corporate tax or Subchapter S). The terms governing an LLP are set forth in its partnership agreement, which Delaware law gives flexibility in setting the specific terms and agreements governing the LLP general partnership can have a written, oral, or implied partnership agreement. An LLP is governed by a written partnership agreement, which must also state an intention to operate as an LLP.

The goal of the LLP form is to permit one partner to avoid liability for the mistakes of another while being held accountable for his/her own negligence or misconduct directly. This ensures that members of professional organizations that are frequent targets of malpractice lawsuits can conduct business without fear that another partners' mistakes will bankrupt the non-offending partner.

The LLC is by far the preferred business form because of its near-complete flexibility of terms and governing provisions, flexibility to make different tax treatment elections, and other reasons; as a result, LLP elections are growing increasingly rare. Although similar in many ways to an LLP, the LLC is seen as a more adaptable business form.  In fact, 73.4% of the new Delaware formations in 2021 were Delaware LLC’s in contrast the LLP was less than .001% of our Delaware formations for 2021.  

Throughout my years of helping clients form Delaware entities, the Limited Liability Partnership has come up in conversations; however, the structure is rarely utilized, most business owners tend to form an LLC instead.  Traditionally when there is a need for the LLP, it is often at the direction of a client’s attorney for a very specific situation.   

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