Limited liability partnerships (LLPs) are a flexible legal and tax entity that allows partners to benefit from economies of scale by working together while also reducing their liability for the actions of other partners.

As with any legal entity, it is important that you check the laws in your nation (and your state) before getting too excited. In short, check with a lawyer first. The chances are good that they have firsthand experience with an LLP.

Understanding a Limited Liability Partnership (LLP)

To understand an LLP, it is best to start with the general partnership. A general partnership is a for-profit entity that is created by a mutual understanding between two or more parties. This is a very technical way of describing two or more people working together to make money. A general partnership can be quite informal. All it takes is a shared interest, perhaps a written contract (though not necessarily), and a handshake.

Of course, with the informal nature of a general partnership, there is a downside. The most obvious risk is that of legal liability. In a general partnership, all partners share liability for any issue that may arise.

For example, if Joan and Ted are partners in a cupcake venture and a bad batch results in people getting sick, then they can both be personally sued for damages. For this reason, many people quickly turn general partnerships into formal legal entities to protect personal assets from being part of any lawsuit.

The actual details of an LLP depend on where you create it. In general, however, your personal assets as a partner are protected from legal action. Basically, the liability is limited in the sense that you may lose assets in the partnership, but not those outside of it (your personal assets). The partnership is the first target for any lawsuit, although a specific partner could be held liable if they personally did something wrong.

LLP vs. LLC

An LLP and a limited liability company (LLC) both offer protections for their owners. The LLP is a formal structure that requires a written partnership agreement and usually comes with annual reporting requirements, depending on your legal jurisdiction.

It differs from an LLC in its liability protections, however, as well as management requirements. LLCs have more flexibility in who can manage the business. LLPs require management duties be equally divided. Protection-wise, LLCs protect members from personal liability for debts or claims on the business. With an LLP, a partner is not liable for another partner’s mistakes.

Overall, it is the flexibility of an LLP for a certain type of professional that makes it a superior option to an LLC or other corporate entity. Like an LLC, the LLP is a flow-through entity for tax purposes. This means that the partners receive untaxed profits and must pay the taxes themselves. Both an LLC and an LLP are preferable to a corporation, which is taxed as an entity and its shareholders taxed again on distributions.

LLP vs. LP

As in a general partnership, all partners in an LLP can participate in the management of the partnership. This is an important point because there is another type of partnership—a limited partnership (LP)—in which one partner, known as the general partner (GP), has all the power and most of the liability and the other partners are silent but have a financial stake. With the shared management of an LLP, the liability is also shared—although, as the name suggests, it is greatly limited.

Benefits of an LLP

Professionals who use LLPs tend to rely heavily on reputation. Most LLPs are created and managed by a group of professionals who have a lot of experience and clients among them. By pooling resources, the partners lower the costs of doing business while increasing the LLP’s capacity for growth. They can share office space, employees, and so on. Most important, reducing costs allows the partners to realize more profits from their activities than they could individually.

The partners in an LLP may also have a number of junior partners in the firm who work for them in the hopes of someday making full partner. These junior partners are paid a salary and often have no stake or liability in the partnership. The important point is that they are designated professionals who are qualified to do the work that the partners bring in.

This is another way that LLPs help the partners scale their operations. Junior partners and employees take away the detail work and free up the partners to focus on bringing in new business.

Another advantage of an LLP is the ability to bring partners in and let partners out. Because a partnership agreement exists for an LLP, partners can be added or retired as outlined by the agreement. This comes in handy, as the LLP can always add partners who bring existing business with them. Usually, the decision to add requires approval from all of the existing partners.

LLPs Around the World

LLPs exist in many countries, with varying degrees of divergence from the U.S. model. In most countries, an LLP is a tax flow-through entity intended for professionals who all have an active role in managing the partnership.

There is often a list of approved professions for LLPs, such as lawyers, accountants, consultants, and architects. The liability protection also varies, but most countries’ LLPs protect individual partners from the negligence of any other partner

The Bottom Line

The limited liability limited partnership (LLP) structure of organizing a business allows each partner to both enjoy limited liability from outside stakeholders as well as from the other partners. All partners are thus limited partners (LPs) and there is no general partner (GP). This type of partnership is particularly useful when a group of professionals, like doctors or lawyers, form a partnership, since lawsuits may be more common for malpractice or similar faults of a partner. In an LLP the other partners and the business itself would not be responsible for the acts of another.