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.
|
Topic |
LLP |
General Partnership |
Limited Partnership (LP) |
LLC |
|
Management |
All can participate in management and ordinarily do so |
All can participate subject to Partnership Agreement, fully liable regardless |
General partner(s) must manage; limited partners involved in management lose liability protection |
All members can participate subject to LLC operating agreement |
|
Liability Terms |
All partners have limited liability |
All partners fully personally liable |
General partner(s) fully liable, while passive, limited partners have limited liability |
All members have limited liability |
|
Tax Status |
Pass-through under Subchapter K |
Pass-through under Subchapter K |
Pass-through under Subchapter K |
Pass-through under Subchapter K (or may elect corporate taxation under Subchapter C or a different type of pass through under Subchapter S) |
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.
Feel free to reach out to our team with any questions about forming a company in Delaware at 800 345 2677 or DelawareInc via skype
*Disclaimer*: Harvard Business Services, Inc. is neither a law firm nor an accounting firm and, even in cases where the author is an attorney, or a tax professional, nothing in this article constitutes legal or tax advice. This article provides general commentary on, and analysis of, the subject addressed. We strongly advise that you consult an attorney or tax professional to receive legal or tax guidance tailored to your specific circumstances. Any action taken or not taken based on this article is at your own risk. If an article cites or provides a link to third-party sources or websites, Harvard Business Services, Inc. is not responsible for and makes no representations regarding such source’s content or accuracy. Opinions expressed in this article do not necessarily reflect those of Harvard Business Services, Inc.
More By Brett Melson
There are 3 comments left for What to Know about a Limited Liability Partnership
Legalo said: Saturday, June 11, 2022Hi Brett, Thank you for sharing information on LLP partnership. Very useful for new users. It is important as it is directly related to company's debts or responsibilities. Thanks for the post.
HBS Staff replied: Monday, June 13, 2022Hello Legalo,
Thank you for reading our blog and we are glad you found it helpful. We are here to assist with any questions.
leticia darrow said: Sunday, January 19, 2020my husband is a licensed A&P mechanic who does maintenance on helicopters. He just opened his own business but has been turned down for any kind of liability insurance because the company doesnt have enough gross income. so in the meantime we are working with no insurance in a sue happy industry! What are other ways to protect ourselves from being sued and losing our personal assets, ie home, etc? Ive read that even if our business is an LLC, if a pilot crashes or other damage, that often everyone involved including the a&p mechanics are sued for negligence, even if its due to pilot error...and that they go after the mechanic personally not just the business, so having an LLC doesnt help. Do you know if this is true, and what strategies do you suggest?
HBS Staff replied: Tuesday, January 21, 2020This sounds like a frustrating situation. Unfortunately, we cannot provide any legal advice, but would strongly recommend consulting a lawyer to advise you on liability matters.
Kristy Glenn said: Monday, May 7, 2018Very useful articles.I am very glad to see such information about Limited Liability Partnership, LLP.
HBS Staff replied: Monday, May 7, 2018Thanks for reading our blog.