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Comparison
   

 


 

 

 

 

 

Limited Liability Partnerships (LLPs)

General Definition:  A Limited Liability Partnership (LLP) is like a General Partnership, where all partners are given a right to control the entity.  However, unlike a General Partnership, a LLP provides each partner with limited liability.  In most states, LLPs are only available to a select group of professions, such as law and accounting firms.

 

major benefits major drawbacks
All partners have limited liability protection

All partners receive partnership tax treatment (there is no entity level income tax)

Allows flexibility in splitting partnership profits and losses 

Management structure is more streamlined than a corporation

Only available to a select group of professions authorized by each state

All Partners can take an active roll in management, which may result in inefficiencies

Unlike a General Partnership (which is not regarded as an entity), a LLP must pay franchise tax

Similar benefits to LLCs

 

Limiting Personal Liability:  Just like shareholders in a corporation or interest holders in an LLC, Limited Liability Partners are not personally liable for the debts, obligations and liabilities of the partnership.  

Exceptions to limited liability protection:

  1. A LLP takes out a loan, and a partner personally guarantees the loan.  Such personal guarantees are usually required when a LLP is undercapitalized and/or has not established a credit history.
  2. State and federal governments can hold the LLP partner who is responsible for reporting and paying corporate taxes personally liable for unpaid taxes or penalties that come as a result of not paying taxes.  Normally, the party burdened with personal liability is the party known as the "Tax Matters Partner."
  3. Partners can be found personally liable for breach of duty that they owe to the LLP.  Partners have a "duty of care" to act responsibly when performing LLP duties.  Generally, if partners carry out their responsibilities designated to them in the Partnership Agreement, they will not be found in breach of their duty of care.

Piercing the LLP Veil: In certain limited instances, creditors or litigants can attempt to impose personal liability on principals in a LLP by claiming that the LLP is a sham, a device created merely to defraud creditors, or is being run as a sole proprietorship (e.g. the LLP has not been properly formed or there has been a commingling of corporate and individual property).  The process of imposing individual and personal liability is referred to as "piercing the corporate (or in this case 'partnership') veil" or "disregarding the corporate entity."  Ordinarily, a party seeking to pierce the partnership veil will have a heavy burden in attempting to persuade the courts to disregard the partnership entity.

 

terminology

name for owners:
Limited Liability Partners

name for ownership Interest:
Limited Liability Partnership Interests

document that creates the entity:
Certificate of Limited Liability Partnership
(also know as a Registration Statement)

documents that determine 
operating procedure:

Limited Liability Partnership Agreement

 

 

personnel

Limited Liability Partners Limited Liability Partners must be individuals licensed in the profession performed by the LLP.  They are allowed to participate in the management of the partnership without risking exposure to personal liability. 

 

limited liability partnership formalities

Meetings:  Meetings may be required depending upon state law.  Meetings may also be required by the Limited Liability Partnership Agreement created by the Limited Liability Partners.

Member Reports:  Partners are entitled to call for an accounting or inspect the financials of the Limited Liability Partnership.  Depending on state law, they may also be entitled to annual reports.

State Formalities:  Many states require Limited Liability Partnerships to file annual (in some states biannual) reports with the state, updating the general information concerning the Limited Liability Partnership and its partners.

 

limited Liability partnership names

Most states require the following words or abbreviation to be included in the name of an Limited Liability Partnership:

names

abbreviations

Limited Liability Partnership

L.L.P.

 

profit sharing

Limited Liability Partnership agreements can be drafted to pay Limited Liability Partners in a wide variety of ways.  The following is a simple list of options:

Limited Liability Partners may receive:
  • a percentage of Limited Partnership profits

  • a percentage of gross revenue

  • a percentage of Limited Partnership losses (for tax reasons)

  • a percentage of revenue, profits or losses from a particular revenue stream of the Limited Partnership

  • a percentage of any combination of Limited Partnership revenue, profits or losses from various revenue streams

 

tax implications for a
limited liability partnership

Profits from a Limited Liability Partnership pass through to Limited Liability Partners without being taxed at the entity level.  However, a Limited Partnership will have to file an annual report with the IRS stating how much the each member earned or lost.  

In many states, a Limited Partnership will still be subject to a minimal franchise tax, much like an LLC or S Corporation.

 

tax implications for 
limited liability partners

Income received from a LLP by a Limited Liability Partner must be reported on his or her individual tax return.  Income or losses is generally regarded as active income. 

 

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