Pros & Cons of LLP Vs. Partnership

By Thomas King

Limited liability partnerships, or LLPs, and partnerships, which are sometimes referred to as "general partnerships," are types of business entities that require two or more individuals to create. In general, these two business entities are quite similar with the major exception of liability protection. Online legal document preparation and filing services can help you form a general partnership or LLP.

Limited liability partnerships, or LLPs, and partnerships, which are sometimes referred to as "general partnerships," are types of business entities that require two or more individuals to create. In general, these two business entities are quite similar with the major exception of liability protection. Online legal document preparation and filing services can help you form a general partnership or LLP.

Formation

No formal action or written document is required to form a general partnership. It can either be formed explicitly, as a result of an express contract, or implicitly, as a result of two or more individuals behaving as partners. On the other hand, to form a limited liability partnership, one individual must pay a fee and file the appropriate documents with the secretary of state, or some other state official, depending on the state. Consequently, partnerships are less burdensome to form. However, in the absence of an express agreement, there may be more uncertainty with respect to whether a partnership has been formed. Finally, limited liability partnerships must include the words "Registered Limited Liability Partnership" or "LLP" in the name. Partnerships have no such requirement.

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Liability

The largest distinction between a partnership and a limited liability partnership is with respect to personal liability. In partnerships, each partner is personally liable for all debts of the partnership. For example, if you are one of three partners in a general partnership and one of the partners is sued for malpractice, the plaintiff can go after your personal assets -- which may occur if the partner who committed the malpractice is unable to pay. On the other hand, LLPs largely ensure that partners are not liable for the actions of other partners. Keep in mind, however, that you are not protected from lawsuits for your own actions. Additionally, the exact scope of the liabilities from which you are protected varies by state. Further, a disadvantage of LLPs is that individuals may be wary of doing business with the partnership knowing that the partners do not have personal liability.

Additional Considerations

In some states, only professionals who are required to have licenses, such as doctors or lawyers, are allowed to form a LLP. If you are considering forming a LLP, you may want to consider forming a limited liability company, or LLC, instead. The owners, known as members, of LLCs receive protection from personal liability just like partners of LLPs. You do not have to provide professional services to form an LLC. The tax structure is the same for partnerships, LLPs and LLCs.

Taxes

Both LLPs and general partnerships are taxed under the partnership classification by the Internal Revenue Service by a process called pass-through taxation. This means that the company's profits are passed on to the partners, who report their earnings on their individual tax returns. This process allows the business’s profits to skip taxation at the company level.

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Difference Between LLC & LLP

References

Related articles

How to Change From an LLC to an LLP

Converting from an LLC, or limited liability company, to an LLP, or limited liability partnership, differs from state to state. While most states permit LLCs, some states do not authorize LLPs. Always check with your Secretary of State to learn if you can convert to an LLP, and identify the form or format required. Changing to an LLP can get a bit complicated at times. For example, if you now have a one-member LLC, you'll have to create a formal partnership agreement, naming all the partners, their ownership percentage, how profits will be divided and all other partnership management details.

South Carolina LLP Laws

South Carolina law regulates how a Limited Liability Partnership, or LLP, may form, operate, and ultimately dissolve. Unlike limited partnerships or general partnerships where one or more partners are personally liable for the debts of the business, an LLP limits liability for all partners. Each partner may participate in the management of the business, and receive a portion of the profits.

Which Is Better: an LLC or an LLP?

Many businesses that want the benefits of corporations without the complex tax rules and expensive startup costs involved with that type of entity choose to form as a limited liability company, or LLC, or a limited liability partnership, or LLP. Potential business owners must weigh the pros and cons of each structure when deciding which is better for their company. While LLC legislation is widespread, not all states have LLP laws.

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