LLP or Limited Liability Partnership

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Usually you only see a LLP with a law firm, architects or an accounting firm but depending on what state you are in it can be used in different situations. A LLP structure and main point of focus is on allocating risk to the biggest partner who put in the most chips. So if you, Elvis, MJ, and Diana Ross formed a partnership since you are not as paid as them if they get sued you will only be liable for the percentage of the money you put in to start the partnership. Since most likely that will less than 1% then when they get sued for 100K you’ll only have to pony up 1k!

Advantages:

• Each partner is responsible only for the amount of money he has given or promised to the partnership, and each partner is not “personally liable.” By limiting liability to only partnership liability, the only money that a person suing the partnership could win is partnership money–not a partner’s personal savings. This makes limited liability partnerships more secure and less financially risky than a partnership.
• Limited liability partnerships are taxed directly through the partnership. This avoids corporate double-taxation, where income from a corporation and distributed profits are both taxed. Because small (“close”) corporations suffer from double-taxation, a limited liability partnership may offer significant tax relief.
• The ability to directly manage a partnership is a significant advantage of a limited liability partnership. Limited liability partnerships avoid the unnecessary extra steps by allowing each partner to directly own, control, or both, a portion of the partnership.

Disadvantages

• While some states restrict liability of partners in a limited liability partnership, some do not. For example, some states will only limit liability only for negligent civil wrongdoings (“torts”) but will allow personal liability for intentional torts or criminal actions. Other states do restrict liability, even for intentional torts–but it is important to realize that there may be some situations where personal liability may arise.
• Some states restrict what professions may form a limited liability partnership. Traditionally, professional fields of study such as attorneys, architects and accountants are included. Some states actually limit limited liability to these traditional fields.
• The partnership will still be liable for actions taken by a partner in furtherance of the partnership. This means that financially, being a member of a limited liability partnership may be less secure than merely being a shareholder of a corporation.

Overall a LLP should be considered if you are entering into a agreement with a person who might pony up the majority of the money. On paper you still want to be a partner in the new entity but you also might want to make sure you don’t bear too much responsibility if things go bad.

In a professional firm lawyers, accountants and architects being elevated to partner is something that keeps people working. Allowing people to share in the profits of the big company but not allowing them to run the company. A LLP is a great structure if you think you will be adding a lot of partners to the fold in the future.

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