What Is A Limited Liability Partnership (LLP)

Business entity that has limited liability for all partners (except for professional negligence of each).  Just like shareholders in a corporation. 

A hybrid form of organization in which all partners enjoy limited liability for the business's debts. It combines the limited liability advantage of a corporation with the tax advantages of a partnership.

However, unlike corporate shareholders, the partners have the right to manage the business directly.

Partners of a limited liability partnership are not liable for other partners’ (or employee or agent of the partnership) negligence, malpractice or wrongful acts or misconduct . However, they are liable for other partnership debts and obligations as well as for their own negligence, malpractice or wrongful acts, or misconduct, and that of any person under their direct supervision and control.

If there is no partnership agreement, income, losses and gains will be allocated in proportion to the partnership interests of each partner. Partners can agree among themselves as to how income, losses, and gains are divided among the partners. The partners then report the amount allocated on their own income tax returns and pay tax accordingly.

A limited liability partnership ("LLP") is essentially the same thing as a limited liability company ("LLC"), except that an LLP is specifically designed for use by certain professions (for example, accountants, lawyers or architects).

Advantages

1.  Pass Through Taxation:  Income, losses and gains are passed through to the  partners according to the partnership agreement and reported as personal income.

2.  Lower Tax Rate:  Partners are taxed at the personal tax rate rather than at the corporate tax rate.

3.  Limited Liability:  All partners are not held personally responsible for the debts and liabilities of the business.

4.  Partnership conversion:  Easier conversion from a general partnership to an LLP than to a LLC or corporation

Disadvantages

1.  Liability:  Partners are still exposed to some degree of liability.

2.  Lack of continuity in business:  If a partner decides to leave, the Partnership may cease to exist.  Must specify in the partnership agreement how these situation will be handled in order to maintain continuity of the organization.

3.  Organization in absence of owner:  Ownership is shared between the partners.  There is no single owner.

4.  Difficulty in raising capital:  Financial institutions find it difficult to lend to an organization that does not have perpetual existence and to which the members are exposed to some degree of risk.

Resources

IRS Partnership requirements

You must file with the respective State to register the business.

Partnership Agreements

See a comparison matrix between the different organizations