Limited Liability Partnership: Advantages & Disadvantages

What is a Limited Liability Partnership?

A limited liability partnership (LLP) is a professional partnership where only professionals in the area of law, accountancy, architecture, engineering, and land surveying are allowed to create a LLP. If your business falls under one of those areas, then you may form your business as a LLP. A LLP is created when one or more professionals come together to want to conduct business to make a profit.

The personal liability of a LLP is different from a general partnership or a limited partnership. In a LLP, every partner enjoys limited liability, meaning that every partner is not personally liable for the acts of every other partner and are not personally liable for any debts the partnership takes on. This means that every partner’s personal assets (e.g. your house, car, etc.) will not be used to help pay off any loans or unpaid orders the partnership or another partner took on. Only the funds in the partnership can be used to pay off any debts.

However, this does not mean that you or any other partner is not personally liable for your own conduct. If you are the one who took out a bank loan on behalf of the partnership and now cannot pay it off, then your personal assets will be used to pay off the bank loan if the partnership does not have enough funds. Partners in a LLP do not have to give up having a say in the day-to-day business operations to enjoy limited liability protection unlike in a limited partnership.

Advantages of a Limited Liability Partnership

• Limited liability for all partners – All partners are not personally liable to the actions of every other partner or to any debts the partnership takes on

• No double taxation (flow through taxation)– The partnership itself is not taxed and instead, each partner is taxed individually with the profits/losses being reported on each partner’s own income tax

  • This is different from a corporation where the corporation will have to pay a business tax for simply operating as a corporation and additionally, each shareholder will have to pay taxes on their own income tax forms

• Increased financial resources – Can pool funds with a partner(s), which can double or triple the amount of funds your business has to operate from

Disadvantages of a Limited Liability Partnership

• Not easy to form – There are many forms to fill out and file to become a LLP

• A little pricey – With added forms to file, there are additional filing costs and there is the cost of paying insurance premiums to have at least a $1 million coverage.

• Franchise Tax Board tax – Unlike a general partnership, a limited liability partnership will have to pay the California Franchise Tax Board a tax just for the privilege of doing business in California

  • Keep in mind that this tax is imposed on the partnership as a business entity and each partner will still have to pay additional taxes on their own personal income tax forms

LLP Formation Costs

• Business License/Permits – check out http://www.calgold.ca.gov/ to know exactly what licenses and permits you need to obtain to conduct business in your particular city and county

• Application of limited liability partnership

• Partnership Agreement

• Increased insurance coverage to meet security provision requirement

• Filing costs for filing the added forms with your applicable professional board

• Franchise Tax of at least $800/year

• Fictitious Business Name, if applicable

• Obtaining an Employer Identification Number (EIN)

• Intellectual property protection, such as registering your partnership’s name as a trademark or registering any copyrights or patents your partnership may have

DISCLAIMER: The contents of this article represent the opinions of the author and do not constitute as legal advice. Due to the generality of this article, the information provided herein may not be applicable in all situations and should not be acted upon without consulting with an attorney. Neither this article nor any legal analysis, legislative updates, or other content derived from it should be construed as legal or professional advice or as a substitute for such advice. No attorney-client or confidential relationship is formed by the transmission of this article. The choice of a lawyer or other professional is an important decision and should not be based solely upon this article. No representations are made as to the accuracy, completeness, or validity of any information contained herein.

Contact the Law Office of George R. Bravo to find out how any information here applies to your particular circumstances.