How to Form a Limited Liability Partnership

How an LLP Differs From Other Partnership Types

Limited Liability Partnership
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The limited liability partnership is a specific type of partnership that combines the advantages of the corporation and partnership forms of business.

What is a Partnership?

Partnerships come in several different types. All partnership types have several common characteristics: 

1. All partnerships consist of individuals who have agreed (with a partnership agreement) to run a business together. Each partner has invested in the business. 

2. The partnership is a separate entity, but in most cases, the partners have liability for the actions of the partnership. This arrangement differs from a corporation, which is separate from the owners. 

3. The partners are not employees. The partners take money from the business as distributive shares, not salaries. 

4. All types of partnerships pay income taxes by filing an information tax return on IRS Form 1065, with individual partner shares of the income or loss of the partnership reported on a Schedule K-1. 

How is a Limited Liability Partnership Different from Other Partnerships? 

A limited liability partnership (LLP) is different from a general partnership or a limited partnership. In an LLP all partners are shielded from wrongful acts or negligence of other partners.

As noted above, an LLP combines characteristics of partnerships and corporations, particularly in the area of limited liability. Typically a partnership does not provide the individual partners with limited liability from lawsuits and debts. But in the LLP form, as in a corporation, all partners have limited liability, from errors, omissions, negligence, incompetence, or malpractice committed by other partners or by employees. Of course, any partners involved in wrongful or negligent acts are still personally liable, but other partners are protected from liability for those acts.

In an LLP, all partners have the same general management responsibilities. Because an LLP is a partnership, the flexibility of management in an LLP is not the same as with a limited liability company.

Many professionals form LLPs because they are protected to some degree from being involved in a malpractice lawsuit against another partner.

How is a Limited Liability Partnership Different from an LLC?

The most obvious difference between an LLP and an LLC is that the owners of an LLP, like other partnerships, are partners. The owners of a limited liability company (LLC) are called members.

Liability of owners is the biggest difference between an LLP and an LLC. Partners in an LLP are not typically liable for the debts or negligent acts of another partner. Liability of members of an LLC is limited to each member's contribution, without considering the liability of other members or of the LLC as a whole. This protection is called a corporate shield or a corporate veil.

In either type of business, wrongdoing or negligence outside the scope of the owner's duties doesn't have liability protection. Some examples of these actions might be if an owner sexually harasses an employee or client, steals from the company, or physically assaults someone.

Some other differences between the LLP and the LLC:

Management. Members of an LLC can decide between member-management and hired management, while partners in an LLP manage the partnership themselves.

Taxation. An LLC has several tax options; it can be taxed as a corporation or an S corporation. An LLP can only be taxed as a partnership.

How Does an LLP Differ From a Limited Partnership?

Don't confuse an LLP with a limited partnership. A limited partnership is a type of partnership with both general partners and limited partners

How to Form a Limited Liability Partnership

Like other types of partnerships, a limited liability partnership is formed in the state in which the partnership does business. Most states have the business filings section in the office of the secretary of state for your state or equivalent department.

The partnership must register as a specific LLC in the state, filing a form as a "limited liability partnership" or similar type of declaration. The partnership should also create a partnership agreement to spell out how to run the partnership and what happens in various circumstances. 

Most states allow all professionals to form LLP's; a few states limit the ability to form an LLP to accountants and attorneys.