If you plan to operate a business with at least one other person and want to limit risk to your personal assets, then you might consider forming a limited liability partnership. Such companies usually do work in professional services industries like law, medicine and engineering and allow each partner to work independently.
Limited liability partnership advantages such as a flexible business model, tax benefits and asset protection can make this business model attractive. However, you should also learn about limitations with this model along with rules regarding the types of businesses that can operate as limited liability partnerships.
How Limited Liability Partnerships Work
Like other types of partnerships, limited liability partnerships involve having at least two individuals act as owners of a business. This involves contributing to and sharing the financial results, whether good or bad, and each individual putting his effort and expertise into operating the business. Partners may all act as managers unlike what regular limited partnerships allow. Further, each partner's financial risk lies just in the funds he's invested, so there's less concern over creditors taking personal assets if the business doesn't succeed.
When making this kind of business, the partners will develop a partnership agreement that sets out specific terms and conditions. This will address how they'll allocate profits and losses, which roles they'll play, how long the partnership will last and how the business will handle adding and removing partners. It also discusses the specifics of liabilities and the personal assets that should be protected.
A limited liability partnership will usually last until the partners agree to dissolve it or the partnership goes out of business. However, this business also dissolves if one or more partners leave, and just one individual remains owning the business. Government entities may also go to court and have the partnership dissolved in rare circumstances, such as misconduct.
Limited Liability Partnership Examples
You'll often see businesses structured as limited liability partnerships when they need the expertise and skills of multiple professionals but some separation of liability when it comes to individuals' actions. Often, these companies operate in the legal, financial, engineering and medical fields where the partners take on substantial risk when doing business and generally conduct their work independently.
Some LLP examples can include veterinarian's offices, dental offices, auditing firms, law firms, financial advising services, business consultancies and real estate agencies. However, state laws might place restrictions on the types of businesses that use this partnership model.
As an example, consider that two doctors named Jane and Joe decide to open a small family practice. Both individuals contributed equally to the business and decided to share their profits based on the number of patients they saw regularly. If Joe gets charged with malpractice, then Jane doesn't have to worry about losing her assets due to his error even though the two conduct business together. However, if Joe loses his medical license as a result of the malpractice, then the partnership would dissolve if Jane remains the only partner left.
Limited Liability Partnership Advantages
If you're thinking about forming a limited liability partnership, consider some of these advantages your business can enjoy:
- Flexible business model: Choosing to form a limited liability partnership gives you much flexibility since you can draft an agreement that allows for some or all partners to have management responsibilities and receive different portions of the business's profit. You can also easily add or remove partners as your business needs change as long as you maintain the minimum of two partners needed for the business to continue to exist.
- Asset protection: Unlike a general partnership that puts you at financial risk if a partner does something personally that hurts the business, you have much more personal asset protection with a limited liability partnership. You don't have to worry about getting sued or paying for your partner's misconduct. Instead, you're only responsible for yourself and for paying for your own mistakes.
- Relatively simple setup: While state requirements vary, you usually follow a straightforward process to form your limited liability partnership. Often, this involves checking eligibility, naming your business, choosing a registered agent, getting necessary business licenses, making your partnership agreement, filling out your state application and meeting any other state and federal requirements. You usually do pay an incorporation fee, but it's usually in the hundreds rather than thousands of dollars. You also get the option to operate in various states.
- Potential tax benefits: With a limited liability partnership, you don't have to face double taxation like you would with a C corporation. Instead, each partner completes an individual tax return and pays her own taxes as they're due. Partners can also deduct their business expenses to keep more of their profits.
Limited Liability Partnership Disadvantages
Limited liability partnerships do come with some downsides to consider. These include the following:
- Not risk-free: Despite the personal liability protection a limited liability partnership provides, partnership assets still remain at risk if your partner commits an act that leads to legal or financial consequences. Therefore, you can still lose the money you've invested in the business, just not your personal assets. Further, you don't escape the consequences of actions your partnership as a whole may commit, like fraud or failure to meet state regulations.
- Issues with partners: Since partners can still act independently, this comes with the chance that a partner might enter a contract or make managerial decisions that aren't in the partnership's best interests. At the same time, personal arguments can occur that put the business at risk and disrupt operations. Therefore, setting clear terms and expectations in your partnership agreement is essential.
- State recognition issues: While this partnership model can seem appealing, whether you can actually form this kind of business will depend on your state rules and industry. You also need to deal with issues that can happen when other states and countries may not recognize the limited liability partnership model.
- Extra costs: Depending on your location, your limited liability partnership may be subject to franchise taxes alongside any registration fees you have to pay. These extra costs can occur annually and depend on how many partners you have. You also have to consider the liability insurance that each partner will need alongside any other requirements for your industry.
- Possibility of dissolution: Compared to other business structures like limited liability companies that allow just one member, any kind of partnership comes with the risk that the business can end if you're the only one left. While partners will often make a joint decision on when to dissolve, you might not have any choice if your partner passes away or goes bankrupt. You also risk that your whole business ends if the court rules that it must do so.
Choosing a Limited Liability Partnership
If forming this type of partnership sounds right for your business, then head to your state's secretary of state website to learn about the rules for forming partnerships. You'll need to first verify that your state allows your type of business to register as a limited liability partnership and then explore the requirements.
You can expect to choose an available business name and start with making your partnership agreement and selecting your agent. Along with filing your business with the state, you'll also want to research necessary business licenses, obtain any insurance needed and register with tax authorities.