What‘s an LLP? Limited Liability Partnerships Explained in Under 5 Minutes

So, you‘re starting a business and it‘s time to choose a legal structure. If you‘ll have at least one partner, a limited liability partnership (LLP) is an option worth considering. In this guide, we‘ll break down everything you need to know about LLPs—what they are, how they work, and how to tell if an LLP is the right move for your business.

What Is a Limited Liability Partnership?

A limited liability partnership, or LLP, is a business structure that combines elements of a traditional partnership with the liability protections of a corporation. Here‘s the gist:

• An LLP must have two or more partners (owners)
• All partners have limited liability, meaning their personal assets are shielded from the LLP‘s debts and legal issues
• The LLP itself does not pay income tax; instead, profits and losses "pass through" to the partners‘ individual tax returns

Essentially, an LLP operates like a general partnership but with an added layer of personal liability protection for the partners. This is similar to the "corporate veil" that protects corporate shareholders.

However, it‘s important to note that an LLP doesn‘t fully insulate partners from liability. Each partner is still personally responsible for their own negligence, malpractice, or wrongdoing. The LLP structure simply prevents partners from being on the hook for each other‘s actions or the partnership‘s debts.

The Rise of LLPs: A Brief History

The LLP structure is a relatively recent invention in the grand scheme of business entities. It first emerged in the early 1990s in response to a series of lawsuits and bankruptcies that put the personal assets of partners at professional service firms at risk.

In 1991, Texas became the first state to enact an LLP statute, largely to protect lawyers and accountants. Other states quickly followed suit, and by the early 2000s, all 50 states and the District of Columbia had LLP laws on the books.

While many states initially restricted LLPs to certain professional services, over time most have expanded eligibility. According to a 2020 survey by the National Association of Secretaries of State, nearly 73% of states now allow any type of business to form as an LLP.

As of 2023, there are over 140,000 active LLPs in the United States, based on data from the IRS. The vast majority are concentrated in a handful of states:

State	Number of LLPs
Texas	28,452
New York	26,191
California	19,756
Florida	12,605
Illinois	8,401

Source: IRS Business Master File, 2023

While these numbers pale in comparison to the millions of corporations and LLCs that exist, LLPs have become an increasingly popular choice for certain industries and business situations.

LLP vs. LP vs. LLC vs. Corporation

One common area of confusion is how LLPs differ from other business structures that offer liability protection, namely limited partnerships (LPs), limited liability companies (LLCs), and corporations. Here‘s a quick breakdown:

Entity Type	Limited Liability?	Tax Treatment	Management
LLP	Yes, for all partners	Pass-through	Partner-managed
LP	Yes, for limited partners only	Pass-through	General partner-managed
LLC	Yes, for all members	Pass-through or corporate tax	Member-managed or manager-managed
Corporation	Yes, for all shareholders	Corporate tax	Board of directors and officers

As you can see, LLPs share similarities with each of these other entities, but with a distinct combination of features:

• Like LPs, LLPs have pass-through taxation and at least two owners. But in an LP, the general partners have unlimited personal liability.

• Like LLCs and corporations, LLPs provide full limited liability for owners. But LLPs are less formal and complex than corporations.

• LLPs are unique in being partner-managed, meaning all partners participate in running the business. LLCs and corporations can have passive owners.

There‘s no one "best" choice for every business. It depends on your unique circumstances, goals, and industry. That said, LLPs are often an attractive middle ground between the informality of a partnership and the rigidity of a corporation.

When an LLP Makes Sense—and When It Doesn‘t

So how do you know if an LLP is right for your business? Here are some common situations where an LLP can work well:

1. Professional services firms: Historically, LLPs have been most popular among lawyers, accountants, doctors, architects, and other professionals who want to partner up while minimizing liability. Many states have special rules for these professional LLPs.

2. Closely held businesses: Family-owned businesses, husband-and-wife teams, and groups of friends starting up can use an LLP to formalize their arrangement without the complexity of a corporation.

3. Real estate investing: LLPs are a common vehicle for real estate investment partnerships, as they allow partners to pool their money while keeping their other assets separate.

4. Franchise operations: Some franchisors structure each of their locations as separate LLPs, providing a layer of liability protection.

On the flip side, an LLP is likely not the best fit if:

• You plan to seek outside investors, as LLPs can‘t issue stock
• You want to reward employees with equity compensation
• You plan to go public someday, which isn‘t possible with an LLP
• Your business will hold significant assets like real estate or intellectual property, as these are still at risk in an LLP
• You‘re a solo owner, in which case an LLC or corporation likely makes more sense

It‘s also important to note that some states have restrictions around LLPs. California, for example, only allows LLPs for architects, accountants, attorneys, and engineers. New York requires LLPs to carry liability insurance. Be sure to check your state‘s specific rules.

How to Form an LLP: Step-by-Step

Think an LLP might be the right structure for your business? Here‘s a general roadmap of the steps to form one:

1. Choose an available business name that complies with your state‘s naming rules, which typically require including "LLP" or "Limited Liability Partnership" at the end
2. Draft a partnership agreement outlining each partner‘s roles, responsibilities, ownership stake, and profit sharing arrangement—while not always legally required, this is an important step
3. Appoint a registered agent to receive official notices and service of process on behalf of the LLP
4. File the required paperwork (usually called a Certificate of Limited Liability Partnership) with your state‘s business filing agency, along with paying a filing fee
5. Obtain any required business licenses and permits to operate in your industry and location
6. Apply for an Employer Identification Number (EIN) from the IRS for banking and tax reporting purposes—multi-member LLPs must have an EIN
7. Set up a business bank account to keep your LLP‘s finances separate from the partners‘ personal assets

While it‘s possible to handle these steps on your own, it‘s often wise to consult with an attorney or accountant to make sure your LLP is properly set up. Many online legal services like LegalZoom, Rocket Lawyer, and Incfile also offer LLP formation packages.

The exact process and costs to form an LLP vary by state. According to a 2021 survey by Thumbtack, the average LLP filing fee is $165, but ranges from $50 in Missouri to $500 in Massachusetts. Turnaround times can be anywhere from a few days to several weeks.

Operating Your LLP the Right Way

Forming your LLP is just the beginning. To maintain your liability protection and set your business up for success, here are some best practices to follow:

• Hold regular partner meetings and document major decisions in writing
• Keep your LLP‘s bank account and credit cards separate from the partners‘ personal finances
• Maintain accurate and organized financial records for tax purposes
• Consider having partners make capital contributions to represent their ownership stake in the LLP
• Treat your LLP as a distinct business entity—for example, use the LLP‘s name when signing contracts
• Purchase appropriate liability insurance to further protect yourself, such as general liability, professional liability, or property insurance

Depending on your state, you may also need to file an annual report for your LLP to remain in good standing. This is typically a simple form confirming your business details and a small filing fee.

As an added layer of protection, some LLPs choose to trademark their business name and logo. While not required, this can prevent other businesses from using a similar name and strengthen your brand.

LLP FAQs

Still have questions about LLPs? Here are answers to some of the most common ones:

Can an LLP have an unlimited number of partners?

Technically yes, although most states require you to list all partners in your formation paperwork. The complexity of managing an LLP does increase with more partners.

How are partners in an LLP taxed?

Partners in an LLP report their share of the business income, deductions, and credits on their personal tax returns. The LLP itself does not pay income tax. However, partners are considered self-employed and must pay self-employment tax on their share of the LLP‘s profits.

Can an LLP have foreign partners?

Yes, LLPs can have non-U.S. citizen partners. However, having foreign partners can complicate the LLP‘s tax situation. It‘s best to consult with an international tax expert.

Does an LLP need a separate bank account?

Yes, it‘s crucial for an LLP to have a dedicated business bank account and keep detailed financial records. Commingling business and personal funds can jeopardize the partners‘ liability protection.

Can an LLP own property?

Yes, an LLP can purchase, own, and sell both real property (like an office building) and personal property (like equipment and inventory). However, these business assets are not shielded from the LLP‘s liabilities.

Can an LLP convert to another entity type?

In most states, yes. The exact process depends on your state‘s laws, but often involves dissolving your LLP and forming a new LLC or corporation. Some states like Delaware allow for a more streamlined "statutory conversion."

How long does it take to form an LLP?

The turnaround time varies by state, but typically ranges from a few days to a few weeks. Expedited filing is usually available for an additional fee.

How much does it cost to form an LLP?

Again, this varies by state. But according to a 2021 survey by Thumbtack, the average LLP filing fee is $165, with a range of $40 to $500 across states. Some states also have ongoing fees like annual report fees or taxes.

The Bottom Line on LLPs

Limited liability partnerships can be a smart choice for business owners who want the simplicity of a partnership plus the liability protection of a corporation. While not the right fit for every business, LLPs are popular among professional service firms, family businesses, and investment partnerships.

Ultimately, the decision to form an LLP should be based on your specific business needs, goals, and industry. Be sure to consult with legal and tax professionals to weigh your options and ensure proper setup and compliance.

For more on choosing the right business entity, check out the following resources:

• IRS guide to business structures
• SBA‘s choose a business structure guide
• State-by-state guide to LLP laws

With the right structure, strategy, and support, your business partnership can thrive for years to come as an LLP. For more expert tips on starting and growing a business, visit [website.com].