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FORM A LIMITED LIABILITY PARTNERSHIP

A limited liability partnership (LLP) is similar to an LLC in that all partners have limited liability for business debts, but many states this liability protection is less than what LLCs or corporations receive.

Advantages of a Limited Liability Partnership (LLP):

• LLPs allow for pass-through taxation
• All partners are not held personally responsible for the debts and liabilities of the business
• Partners have more flexibility in structuring the management with less formal requirements and annual paperwork
• Easier conversion from a general partnership to an LLP than to a LLC or corporation

Limited liability partnerships (LLPs) are a relatively new form of business organization. They appeared on the scene in the 1990s after the popularity of limited liability companies really took off (they were added to the federal partnership tax return as an entity type in 1998). LLPs are similar in concept to LLCs, but with these differences:

• Type of business. LLPs can only be used for certain types of professional practices (state law delineates the professions). Generally, LLPs are used for the practices of accountants, attorneys, physicians, dentists, architects, veterinarians, licensed masseurs/masseuses, and another other disciplines treated as professions under state law. The business must be limited to rendering professional services of the licensed owner-partners.
• Personal liability. LLPs can limit the liability of partners for all things other than personal acts. For example, an LLP comprised of attorneys can limit the liability of the partners on a lease of the LLP or a lawsuit arising from a third party being injured on the premises. It cannot limit the liability of attorneys for their personal malpractice in the practice of law. Important: Depending on the circumstances and state law, an LLP can shield innocent partners from the consequences of malpractice by an offending partner. A partner’s personal assets are generally at stake in a malpractice action against another partner if the partner was supervising or directing the actions that gave rise to the action.

Formation of an LLP is simple. It essentially is the conversion of an existing professional partnership into an LLP. The transformation is accomplished by filing of a single form with the LLP’s state. (Some states require that legal notice of the new LLP be published in the newspapers.)

There must be two or more partners in order to become an LLP. A converting partnership retains its original partnership agreement. The LLP is governed by state law on partnerships. For new professional practices that want limited liability status, they must form a professional limited liability company (PLLC), as explained later.

Tax wise, partners of LLPs are taxed on their share of LLP profits and losses. Usual partnership tax rules govern this treatment.

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