Limited Liability Partnership: Advantages & Disadvantages
What is a Limited Liability Partnership?
A limited liability partnership (LLP) is a professional partnership where only professionals in the area of law, accountancy, architecture, engineering, and land surveying are allowed to create a LLP. If your business falls under one of those areas, then you may form your business as a LLP. A LLP is created when one or more professionals come together to want to conduct business to make a profit.
The personal liability of a LLP is different from a general partnership or a limited partnership. In a LLP, every partner enjoys limited liability, meaning that every partner is not personally liable for the acts of every other partner and are not personally liable for any debts the partnership takes on. This means that every partner’s personal assets (e.g. your house, car, etc.) will not be used to help pay off any loans or unpaid orders the partnership or another partner took on. Only the funds in the partnership can be used to pay off any debts.
However, this does not mean that you or any other partner is not personally liable for your own conduct. If you are the one who took out a bank loan on behalf of the partnership and now cannot pay it off, then your personal assets will be used to pay off the bank loan if the partnership does not have enough funds. Partners in a LLP do not have to give up having a say in the day-to-day business operations to enjoy limited liability protection unlike in a limited partnership.
Advantages of a Limited Liability Partnership
Limited liability for all partners – All partners are not personally liable to the actions of every other partner or to any debts the partnership takes on
No double taxation (flow through taxation)– The partnership itself is not taxed and instead, each partner is taxed individually with the profits/losses being reported on each partner’s own income tax
This is different from a corporation where the corporation will have to pay a business tax for simply operating as a corporation and additionally, each shareholder will have to pay taxes on their own income tax forms
Increased financial resources – Can pool funds with a partner(s), which can double or triple the amount of funds your business has to operate from
Disadvantages of a Limited Liability Partnership
Not easy to form – There are many forms to fill out and file to become a LLP
A little pricey – With added forms to file, there are additional filing costs and there is the cost of paying insurance premiums to have at least a $1 million coverage.
Franchise Tax Board tax – Unlike a general partnership, a limited liability partnership will have to pay the California Franchise Tax Board a tax just for the privilege of doing business in California
Keep in mind that this tax is imposed on the partnership as a business entity and each partner will still have to pay additional taxes on their own personal income tax forms
LLP Formation Costs
Business License/Permits – check out http://www.calgold.ca.gov/ to know exactly what licenses and permits you need to obtain to conduct business in your particular city and county
Application of limited liability partnership
Increased insurance coverage to meet security provision requirement
Filing costs for filing the added forms with your applicable professional board
Franchise Tax of at least $800/year
Fictitious Business Name, if applicable
Obtaining an Employer Identification Number (EIN)
Intellectual property protection, such as registering your partnership’s name as a trademark or registering any copyrights or patents your partnership may have
*The above article is for general informational purposes only and should not be taken as legal advice. Please contact a business lawyer to find out how any information here applies to your particular circumstances.