It is sometimes advantageous for individuals and legal entities such as corporations to form business partnerships together. While this type of arrangement may provide tax benefits or limitations on liability for some or all of the partners, it also is more complex and requires additional care to ensure that all legal requirements are met.
Limited Liability Partnerships
Partnerships are governed by state law. In a general partnership, all partners are personally liable for the partnership's legal obligations. A limited liability partnership (LLP) is a special type of partnership allowed by a majority of states, which protects each partner from liability for certain partnership liabilities, such as the negligent acts of the other partners. The specific limitations of liability depend upon the scope of each state's partnership statute. Some states allow only professionals such as doctors, architects and lawyers to form LLPs.
Requirements for LLPs
To qualify as a LLP under state law, a partnership typically must register with the appropriate state entity and include the words Registered Limited Liability Partnership or the acronym LLP in its name. Some states also require that an LLP provide proof of liability insurance or adequate assets to settle potential claims made against the partnership. In addition, an LLP may be required to file an annual report with state authorities.
Who May Be a Partner
As with all aspects of partnership law, state statutes define the individuals and entities allowed to be partners in a partnership, including a limited liability partnership. The typical statute provides that a partnership is the association of two or more persons to carry on as co-owners of a business. A "person" usually is defined as an individual, corporation, business trust, estate, trust, partnership, association, joint venture, government, governmental subdivision, agency, or instrumentality, or any other commercial or legal entity.
S-Corporation is a Person
An S corporation is simply a corporation formed pursuant to state law that has made a special election under the Internal Revenue Code to pass all corporate income through to its individual shareholders to avoid double taxation. It may have no more than 100 shareholders and must restrict those shareholders to individuals and certain trusts, estates and nonprofit organizations. In fact, a partnership is not permitted to be a shareholder in an S corporation. The converse is not true, however, because an S corporation is a corporation and therefore a "person" allowed to be a partner under state partnership laws. A corporation's S election under the Internal Revenue Code will not affect its ability under state law to become a partner in a partnership, including an LLP.
- Nick White/Photodisc/Getty Images