Choose Your Business Formation: What's an LLP?

Thinking about turning your startup into an LLP? Here's everything you need to know before you make that move.

May 24th, 2019   |    By: The Startups Team

What is an LLP?

A limited liability partnership (LLP) is type of business structure in which all partners have limited liability for the business. That’s means they can’t be held personally liable if the company — or one of their partners — is sued.

In an LLP, all partners are allowed to participate in running the business. A company has to have at least two partners to become an LLP.

When it comes to taxes, LLPs avoid the double taxation that some types of corporations are subject to. In a partnership, the profits are taxed solely on the partners’ personal tax returns. In some other types of business formations, the profits are taxed first as corporate income tax and then the shareholders’ dividends are taxed on their personal tax returns. LLPs do, however, sometimes have to pay state franchise taxes.

LLPs are especially attractive to certain types of businesses. Those include ones that are more likely to be sued and want protection like attorneys, doctors, accountants, and doctors, for example. Additionally, companies that currently or in the past were prohibited from forming an LLC (including accountants and attorneys) may also find the LLP structure appealing.

Untitled (11)-min.jpg

How do you set up an LLP?

The process for setting up an LLP differs from state to state, but you’ll likely have submit documents and a fee. Additionally, many states ask for annual reports that included updated information about the LLP. Here’s a general overview of what it takes to set up an LLP.

1. Make sure you can form an LLP

Head to your state’s Secretary of State or Division of Corporation's website. Make sure that, 1. your state allows the formation of LLPs (10 don’t) and that, 2. your type of business qualifies to become an LLP in your state (Nevada, Oregon, New York, and California only allow certain types of professionals to form LLPs). If your type of business doesn’t qualify, then it’s time to start thinking about other types of business entities.

2. Choose a name

Pick a name and make sure it’s not already taken by a business in your state. The name must include the initials “LLP,” it can’t infringe on the name or trademark of another business, and it can’t be fictitious. You should also make sure a domain name that works with the name you choose is available.

3. Create a Limited Liability Partnership Agreement

While not all states require a Limited Liability Partnership Agreement, it’s a good idea to draft one up regardless. Your Limited Partnership Agreement needs to cover profit sharing, loss distribution, asset distribution, participation rights, distribution prevention, buyout agreement, asset appraisal, and expulsion or addition of partners.

You also have to list and explain each member's assets and the fact that these assets can’t be used to pay the debts of another member. Your Limited Liability Partnership Agreement also must include the liability protections of each member in case another member commits a negligent or wrongful act.

4. Designate a registered agent

Who’s going to be in charge of all the legal documents once you’re incorporated? That’s your registered agent and the government is probably going to want to know that name. Your registered agent has to have a physical address within the state where you’re registering. Because they’re in charge of getting all the legal documents, most companies choose to name their lawyer as their registered agent.

5. File a Certificate of Limited Partnership

Regardless of whether or not your state requires a Limited Partnership Agreement, they’re definitely going to require a certificate of limited partnership.

###65. Register for an Employer Identification Number (EIN) The Employ Identification Number (EIN) is the number the government uses to identify you for tax purposes. Think of it like your company’s Social Security Number. You’ll need it for everything money related, from opening bank accounts to paying your employees.

You can file an IRS Form SS-4 or apply via the IRS’ online application for an EIN.

7. Get a state ID number

In addition to an EIN, some states want you to have a state ID number. If that’s a thing your state is doing, you can check in with state Department of Revenue for more info. Your state ID number will be used for state taxes.

8. Register with your state

When you register you LLP with your state, you have to give them your federal EIN, your business address, the full name and contact info of each member, and the name of you registered agent.

9. Get all your licenses and permits

What kinds of licenses and permits does your brand new baby LLP need? Do you need occupational license? Trade licenses? Zoning permits? Health permits? You may know off the top of your head or you may need to consult the Small Business Association (SBA) database of federal and state business licenses. Another good resource is your local City Hall.

Advantages and disadvantages of LLPs

So should you for an LLP? Here are some advantages and disadvantages of LLPs to help you decide.

Advantages of LLPs

1. It’s a separate legal entity Probably the primary reason to form an LLP is the fact that it’s a separate legal entity from its general partners. That separation sets up all of the other advantages of an LLP.

2. Liability protection In an LLP, the general partners are protected from liability against the company and the company is protected from liability against the general partners. However, it’s important to note that the only partners who are protected in an LLP are ones who didn’t cause the debt or the problem.

This liability protection is the reason why certain industries — including law firms, accounting firms, financial service firms, and architects, among others — are more likely to form an LLP. For example, if a lawyer’s office is sued, then the individual lawyers’ personal assets are protected. See the advantage there?

3. No double taxation Unlike some other types of business entities (notably, C corps), LLPs aren’t subject to double taxation. In a partnership, the profits are taxed solely on the partners’ personal tax returns. In some other types of business formations, the profits are taxed first as corporate income tax and then the shareholders’ dividends are taxed on their personal tax returns.

4. You don’t need a lawyer! While some other types of business entities absolutely require a lawyer for formation, you don’t need one to set up an LLP. Obviously it’s a good idea to bone up all the facts before becoming an LLP, but it’s nice to know you can avoid that extra cost!

Disadvantages of LLPs

1. Some states restrict the types of businesses that qualify Some states don’t allow LLPs at all and other restrict the types of businesses that qualify. That’s why it’s important to make sure your business fits the requirements before you start the process of becoming an LLP.

2. Paperwork! Sorry, everyone, but you can’t become an LLP without pretty extensive paperwork. Bummer, but that’s just the way it is!

3. Termination If one of your partners bounces, the LLP is terminated. That may not sound like a big deal when you’re in the excitement of first launching your company, but it can have serious ramifications further down the road if you fall out with one or more of your partners.

3. Shares can’t be traded publicly An LLP can’t publicly trade their shares. While this might be fine for some companies, going public is a popular was for successful startups to give their investors a return on their investments. If your trajectory for your startup includes an IPO, than an LLP is not the right business formation for you.

4. You might need extra insurance LLPs are sometimes required to have extra insurance to cover personal liability. It may not be a huge amount, but it’s something to consider.

LLP versus other types of business entities

LLP vs. LP

LLPs and LPs are very similar, with a few key differences. While an LLP provides limited liability protection to all of its partners, a limited partnership (LP) is a type of business partnership that has two types of partners — general and limited — and there are different liabilities for the two.

General partners can be held personally liable, while limited partners cannot. Limited partners also can’t be involved in the day-to-day operation of the company, which means they can’t intervene even if they don’t like the way things are being run. If they do intervene, they can be converted to general partners and then held liable.

Both LLPs and LPs avoid double taxation and pay taxes on the profits only on the personal tax returns of the members.

LLP vs. LLC

LLC means “limited liability corporation,” which is a type of business structure that creates a legal entity for the business that is separate from the owner, which means that the owner is usually not personally liable for the company’s debts or lawsuits. Other common business entity structures such as corporation, general partnership, or sole proprietorship do not offer the same protections — but, as you now know, LLPs do. LLPs may, however, offer less protection than LLCs.

While an LLP has to have at least two partners — otherwise it can’t be a partnership — LLCs can be sole proprietorships. They can also have multiple owners, however, depending on the company.

Other types of business entities

Not sure an LLP is the right choice for your startup? Want to learn more about some other types of business entities? Don’t miss our guides to everything you need to know when you’re choosing the business formation that’s best for your startup.

What is a Corp? S Corp [What is a C Corp(https://www.startups.com/library/expert-advice/what-is-a-c-corp) [What is a B Corp?](https://www.startups.com/library/expert-advice/what-is-a-b-corp) [Limited Liability Companies (LLC’s): What You Need to Know](https://www.startups.com/library/expert-advice/limited-liability-company-llc) [What is a Limited Partnership?](https://www.startups.com/library/expert-advice/limited-partnership) [Everything You Need to Know About Forming An LTD](https://www.startups.com/library/expert-advice/forming-a-ltd(https://www.startups.com/library/expert-advice/inc-business-formation)


About the Author

The Startups Team

Startups is the world's largest startup platform, helping over 1 million startup companies find customers, funding, mentors, and world-class education.

Discuss this Article

 
Comments
Unlock Startups Unlimited

Access 20,000+ Startup Experts, 650+ masterclass videos, 1,000+ in-depth guides, and all the software tools you need to launch and grow quickly.

Already a member? Sign in

Copyright © 2022 Startups.com LLC. All rights reserved.