A Limited Liability Partnership can be formed after a general partnership has been setup. An LLP also allows for “pass through” taxation (just like an LLC) so the profits and/or losses flow directly into the partner’s tax returns which benefits partners who have a specialized or limited interest in the company.
LLPs are very flexible in that they allow partners to pick and choose how they wish to invest within the company which is beneficial to individual partners but can be a disadvantage to the partnership as a whole when partners make decisions based on personal interests. Also an LLP has a decentralized management structure which makes it more suitable for a business where all owners want the same management rights.
There are several disadvantages to an LLP. A major disadvantage to an LLP is that you still have general partners who have liability over the business and the partners are not obligated to consult business agreements with each other. Like an LLC LLPs are also limited by state regulations where they are not recognized in every state as a business structure and some states limit an LLP to professionals such as doctors or lawyers. Even if the state in question allows LLCs for your profession forming an LLP gives you the option to expand your business into states that prohibit LLCs without having to convert to another business form first. Another major downfall of the LLP is that the death of any partner dissolves the partnership.
If you’re having trouble deciding between the LLP and LLC consider the following and give us a call at Lindemeyer CPA to discuss your options:
- The LLC is a bit more flexible especially in terms of ownership restrictions. LLPs must have more than one partner and must operate like a partnership while LLCs may have any number of members and may operate like Sole Proprietorships Partnerships or S Corporations.
- The LLP requirement of leaving one partner with unlimited liability sometimes defeats the main advantage of an LLP and LLC and may cause discord among your partners.
- The LLC may not be allowed in the states you operate but LLPs are allowed in all states.