Limited Liability Partnership Law and Legal Definition

A limited liablility partnership (LLP) is a general partnership that elects to be treated as an LLP by registering with the Secretary of State. Many attorneys and accountants choose the LLP structure since it shields the partners from vicarious liability, can operate more informally and flexibly than a corporation, and is accorded full partnership tax treatment. In a general partnership, individual partners are liable for the partnership's debts and obligations whereas the partners in a limited liability partnership are statutorily provided full-shield protection from partnership liabilities, debts and obligations. It allows the members of the LLP to take an active role in the business of the partnership, without exposing them to personal liability for others' acts except to the extent of their investment in the LLP. Many law and accounting firms now operate as LLPs. In some states, with certain exceptions, the LLP is only available to attorneys and accountants.

FORMATION

LLPs must register by filing a written statement with the Secretary of State or similar office (along with a filing fee) usually setting forth the name and principal office address, name and address of its agent for service of process, a brief statement of the partnership’s business, the federal employer identification number of the partnership, and a statement that the partnership is registering as a limited libaility partnership. Some states may impose an annual tax on LLPs.

Generally, the name of every partnership filing must end with the words registered limited liability partnership, limited liability partnership or the abbreviation L.L.P. or LLP. Professional limited liability partnerships can also include registered professional limited liability partnership, or professional limited liability partnership. Partnership names cannot include words indicating corporate status, i.e. incorporated, corporation or an abbreviation thereof.

Many LLP statutes require professional LLPs to maintain a minimum level of professional liability insurance (or some equivalent such as a bond or letter of credit). Many states require limited liability partnerships to file annual (in some states biannual) reports with the state, updating the general information concerning the limited liability partnership and its partners and renewing the registration.

MANAGEMENT

Limited Liability Partners must be individuals licensed in the profession performed by the LLP. They are allowed to participate in the management of the partnership without risking exposure to personal liability. The Limited Liability Partnership Agreement defines the operating procedures of the LLP. Meetings may be required depending upon state law. Meetings may also be required by the Limited Liability Partnership Agreement created by the Limited Liability Partners. Partners are entitled to call for an accounting or inspect the financials of the Limited Liability Partnership. Depending on state law, they may also be entitled to annual reports.

LIABILITY

A limited liability partner is not liable for professional malpractice that does not involve that partner. The original Texas LLP statute (enacted in 1991) only protected its members from personal vicarious liability for liabilities of the firm arising from negligent or otherwise wrongful acts or omissions of other members or employees of the firm in the provision of professional services. All members of such "partial-shield" LLPs remained personally liable for the firm's ordinary contractual obligations. All states that enacted LLP legislation followed this partial-shield approach until 1995. In that year Minnesota enacted an LLP statute that gave members of LLPs essentially the same sort of limited liability as is enjoyed by shareholders of a corporation. Partners of a "full-shield" LLP are not liable, as such for any obligations of the LLP. Many states that originally adopted the partial-shield approach have now adopted the full-shield approach. The partial-shield states may still outnumber the full- shield states, but the trend in the US is clearly towards the latter.

There are a few exceptions to limited liability protection. When a LLP takes out a loan, and a partner personally guarantees the loan, that partner is individually liable if the LLP defaults on the loan payment. State and federal governments can hold the LLP partner who is responsible for reporting and paying corporate taxes personally liable for unpaid taxes or penalties that come as a result of not paying taxes. Partners can be found personally liable for breach of duty that they owe to the LLP. Partners have a "duty of care" to act responsibly when performing LLP duties. Also, in certain limited instances, creditors or litigants can attempt to impose personal liability on principals in a LLP by claiming that the LLP is a sham, a device created merely to defraud creditors, or is being run as a sole proprietorship (e.g. the LLP has not been properly formed or there has been a commingling of corporate and individual property). The process of imposing individual and personal liability is referred to as "piercing the corporate (or in this case 'partnership') veil" or "disregarding the corporate entity."

TAXATION

Limited liability partners may choose among the following options: 1) a percentage of limited partnership profits, 2) a percentage of gross revenue, 3) a percentage of limited partnership losses (for tax reasons), 4) a percentage of revenue, profits or losses from a particular revenue stream of the limited partnership, 5) a percentage of any combination of Limited Partnership revenue, profits or losses from various revenue streams.

If structured properly, a limited liability partnership is taxed as a partnership. Profits from a limited liability partnership pass through to limited liability partners without being taxed at the entity level. However, a limited partnership will have to file an annual report with the IRS stating how much the each member earned or lost. Income received from a LLP by a limited liability partner must be reported on his or her individual tax return. Income or losses is generally regarded as active income. In many states, a limited partnership will still be subject to a minimal franchise tax, much like an LLC or S Corporation.

DURATION

The business life of a partnership is unstable because the partnership can be dissolved by agreement of the partners or upon the death or withdrawal of a partner. A limited liability partnership agreement can prevent dissolution if a partner dies or withdraws. To liquidate a limited liability partnership, you must do the following:

  • File the appropriate form with the Secretary of State.
  • Wind up the business.
  • Pay all debts, taxes, and claims against the partnership.
  • Settle partnership accounts.

ADVANTAGES

All partners have limited liability protection.

All partners receive partnership tax treatment (there is no entity level income tax).

Allows flexibility in splitting partnership profits and losses.

Management structure is more streamlined than a corporation.

DISADVANTAGES

Only available to a select group of professions authorized by each state.

All partners can take an active roll in management, which may result in inefficiencies.

Unlike a general partnership (which is not regarded as an entity), a LLP may be required to pay franchise tax.