LLPs, or Limited Liability Partnerships, are partnerships that are protected from liability issues, thanks to the business structure they have.
In particular, it seems to be favored by professionals such as attorneys, accountants, and consultants as they can work together, but at the same time do not have to risk their assets concerning the liabilities of the business.
Shareholders and partners are motivated to do business in LLPs, partial protection from liability, some management leeway as well as advantageous taxation make them ideal for service companies.
The articles seek to review the main characteristics of these organs, their strengths and weaknesses, how they compare with other forms of business structures, and finally how an LLP can be set up.
When a business owner is trying to determine the appropriate structure for their business, it is relevant for them to understand these contextual issues.
Key Features of an LLP
✅ Limited Liability Protection: In the case of LLP, no partner would risk losing his/her personal property in case of debts and liabilities arising due to institutional synthetic positions or obligations. Typically, their liability is limited to the amount of money they are willing to invest in the LLP. Even if declared bankrupt or facing multiple lawsuits, the cash in hand remains untouched for assurance.
✅ Flexibility in Management: While LLPs are created to allow partners to oversee the business, the competencies and expectations of the partners are usually set out in an LLP agreement. Due to this flexibility, even the operational and decision-making processes may be altered to meet the needs of the partners concerned.
✅ Separate Legal Entity: An LLP is a distinct legal entity from its partners in the sense that it can acquire assets, bring and be brought to lawsuits, and transact deals under its guise. This difference enhances the credibility and legal standing of the LLP making it easier to enter into contracts and alliances.
✅ Taxation Benefits: The income of the partners of an LLP is only subject to taxation as personal income which distinctly evades the wrath of double taxation that corporates are subjected to. This ensures that partners will be able to arrange their taxation needs with utmost efficiency and within the limits offered by taxation zones with low personal income tax rates.
✅ No Minimum Capital Requirement: In contrast to other kinds of business structures, for most cases, no minimum threshold of capital requirement is to be met before incorporation of the LLP. Therefore, it is ideal for businesspersons and professionals who have limited resources at hand to use this option.
✅ Perpetual Succession: Alteration in the composition of partners through death, retirement, or insolvency does not affect the continuity of the LLP’s existence. Such continuity is very important in providing durability and effective operation of the business without provision for cessation.
Comparison between LLC and LLP
When choosing between an LLP (Limited Liability Partnership) and an LLC (Limited Liability Company), there are a few fundamental differences that must be outlined:
Personal Liability:
LLC: An LLC is owned and managed by members (owners) who have limited liability, that is, in most instances, such members are shielded from the company’s debts and any lawsuits.
LLP: There is limited liability for the partners of an LLP, but usually they do not have any personal liability for the debts of the business as LLC members do. However, partners in an LLP might be liable for their negligence or wrongdoings.
Management Structure:
LLC: An LLC may either be a member-managed, in which case the members manage the company or the managers manage it, in which case it is called a manager-managed LLC. This broadens flexibility to how the business is governed.
LLP: An LLP is normally managed by its partners. This is best for professional organizations where the partners want to take hands-on control of the business daily.
Taxation:
LLC: An LLC can elect to be taxed as a sole proprietorship, or partnership, or an s-corp, or even a c-corp which offers a wider reach on how the business could be taxed.
LLP: An LLP is a partnership limited liability as they pass through any profits made from personal tax returns which eliminates the issues of double taxation.
Formation and Complexity:
LLC: In most cases, an LLC formation is a more complicated process, involving more documentation and fees for filing. LLCs are more applicable to a wider array of businesses.
LLP: Forming an LLP is usually easier; however, it is mainly limited to professional service organizations such as law practices, accounting practices, etc.
Comparison between LLP and General Partnership
The distinction between LLP and General Partnership LLP focuses on the core fundamentals of liability and the legal structure that binds the operations of the two:
Liability:
LLP: This is to say that in an LLP, the partners have limited liability where they are only required to pay business debts or business obligations to the extent of the amount they invested in the business.
General Partnership: In a GP, every one of the partners has unlimited personal liability thus they can be held liable for the debts and legal obligations of the business.
Legal Entity Status:
LLP: The term also means that the LLP has a legal existence that is separate from its members and therefore an LLP can own assets, sign contracts, and take legal actions in its name.
General Partnership: For GP, is not viewed as a separate legal person. All partners are liable for all business acts performed in the name of the partnership without it being a separate legal entity.
Registration:
LLP: It is necessary to register an LLP in most regions to form such an entity and this is done by following specified legal procedures.
General Partnership: Most general partnerships don’t need a formal registration. In some countries, having a partnership agreement is wise but not mandatory.
Continuity:
LLP: The LLP is an entity that can survive the withdrawal or the demise of the awarding partner, thus, it has continuity.
General Partnership: If one of the partners leaves or dies a general partnership usually comes to an end, or unless a new clause has been drafted.
Taxation:
LLP: Generally, LLPs do not have to file income taxes at a corporate status where the income tax will pass on to owners’ returns thus, avoiding double taxation.
General Partnership: Similar to an LLP, a general partnership also has pass-through taxation, meaning that no taxes are paid at the business level but on profits received which are taxed at the partner’s levels.
In summary, both LLC and LLP provide limited liability but it can be said that typically LLPs are for professional services providers, while LLCs can be for a greater variety of firms. On the contrary, a general partnership is a form of business that does not protect owners from exposure to liabilities, hence, it is the most risky form for most business owners.
Steps to Form an LLP
The general process involves several simple steps but a few distinct regulations depending on the state where the company is going to be started.
Choose a name:
Select a unique and legally acceptable name for the LLP. Ensure the name complies with local regulations, typically requiring “LLP” to be included in the name to signify its status.
Draft an LLP Agreement:
- Mention the roles, responsibilities, and profit-sharing ratio of every member.
- Provide for conflict resolution, and decision-making methods, as well as the procedures of admitting a partner or removing one.
- State how long the LLP should exist (if it is not intended to be perpetual) as well as how it is to be dissolved.
Register with the Relevant Authority:
- Prepare and furnish relevant papers, including the LLP agreement, identity proof, address proof, incorporation forms, etc.
- Pay the prescribed registration fee so that the application may be dealt with quickly.
Obtain Licenses and Permits:
- Find out what specific regulations force members of your sector to comply with. For instance, some sectors like healthcare, finance, and food services may need special licenses.
- Where your LLP is in a restricted profession that demands special ages like law or medical services, apply for professional ages.
Open a Business Bank Account:
- Visit the bank and request a business account after presenting the annals of the incorporation of the LLP and the LLP agreement.
- Ensure that every transaction is conducted through the business bank account to keep all financial records intact.
Comply with Tax and Regulatory Requirements:
- Apply for all necessary identification numbers such as GST, VAT, or EIN for the country you belong to.
- Invest in proper bookkeeping, file annual returns, and follow local laws.
- If it’s compulsory to law, conduct and scale audits regularly.
Develop Internal Policies:
- Establish clear operational procedures for day-to-day activities.
- Establish procedures for communication to enhance openness and transparency among the partners.
- Create policies for employee management if you plan to hire staff.
Launch the Business:
- After fulfilling the legal and operational requirements, proceed to commence activities by advertising the services offered, networking, and making your name well known.
- Check the performance of the LLP at all times and highlight the weaknesses so they can be improved.
When to Consider an LLP
An LLP is an excellent choice for businesses where:
- Configuration of limited liability is a must.
- Partners wish to have freedom in carrying out operational activities.
- The organization deals with professional services or businesses of that nature.
- There is a necessity in fostering teamwork too while ensuring a low level of risk exposure.
How EasyFiling Can Help with Establishing Your LLP
Let’s take a step back and look at the process with EasyFiling for LLP Setup because local rules are followed and the setup process is also simple. Here’s how we can serve you:-
✅ LLP Registration: EasyFiling takes care of all the procedures, documentation, and registration under the respective state authorities to set up the LLP.
✅ Legal Guidance: We can help in putting together the LLP agreement that indicates the respective roles of each partner in terms of responsibilities, rights, and duties.
✅ Ongoing Compliance: We make sure that the taxes, filings, and other legal requirements are performed every year to ensure that the LLP remains in good standing.
✅ Cost-Effective Solutions: We have set up fees that are clear and straightforward hence allowing one’s attention to be on business development rather than worrying about costs.
When setting up a law firm, an accounting firm, or simply a professional service firm, EasyFiling allows you to set up your LLP with ease and most importantly, without losing your mind.
Book a free consultation today with Easyfiling to register your Limited Liability Partnership in the USA.
Frequently Asked Questions (FAQs)
Who can establish an LLP?
In most jurisdictions, LLPs are primarily intended for professional service providers such as lawyers, accountants, architects, and consultants. However, the eligibility criteria may vary by country or state, with some jurisdictions allowing other types of businesses to form LLPs.
Can an LLP have a single partner?
No, an LLP must have 2 partners at minimum. Unlike the single member of a Limited liability company (LLC), the LLP is more flexible in terms of having more than one partner, thus allowing them to share management with the responsibilities.
What happens if a partner leaves an LLP?
The LLP typically continues to exist even if a partner leaves, as it is considered a separate legal entity. However, the LLP agreement should outline procedures for handling the exit of a partner, including buyout provisions or the addition of new partners.
Can an LLP raise capital by issuing shares?
No, shares cannot be issued by LLPs as in the case with corporations. Hence, the terror of having sponsors is higher as compared to the likes of other business structures like corporations, who have the power to float portions of their businesses to potential investors.
Is an LLP required to have an operating agreement?
Although they say that an operating agreement isn’t a requirement in all jurisdictions, the guidelines rather stand to be firmly suggested yes. The relevance of the writing of the deed of a limited liability company rests in the distribution of functions, the distribution of profits, the management, admission, and withdrawal of partners, and decision-making.
Nabin Adhikari
