Limited Liability Partnership (LLP)

A limited liability partnership (“LLP”) is similar to a general partnership, but each partner’s liability is limited to the amount they each contribute to the business. Usually LLPs are used by legal and financial professionals–law firms, accountants, etc.

How it’s Formed: The partners form the partnership by filing a certificate with the state’s corporate filing office, usually the Secretary of State. 

How it’s Taxed: Each partner reports their share of the business’s income or losses on their personal tax return. This is called “pass-through” taxation because the profits and losses of the business pass through to the partners’ personal tax return. The partnership must also file an annual information return to report the income, deductions, gains, losses, etc., from its operations, but it does not pay taxes. Each partner has to file self-employment tax.

Key Benefits

  • Limited liability for the partners for the actions of the company unless related to the partner’s negligence, malpractice, etc.
  • Partners can be as involved as they would like in the day-to-day management of the company without impacting liability protection.

Key Downsides:

  • Partners can be held liable for the actions of the company if resulting from the partner’s negligence, malpractice, etc.
  • LLPs can only be taxed as partnerships. They can’t elect a different tax treatment. 

Other Considerations:

  • While setting up certain partnerships may not require a registration, business owners still need to comply with all applicable laws and regulations. They may need to obtain relevant permits and licenses necessary to do business, and they will need to comply with laws concerning contracts, employment, and intellectual property.  
  • If the business is operating under a trade name, the business owner should still ensure the trade name is available to use and that it doesn’t violate or infringe on any third-party’s rights.
  • Partners are not considered employees and should not be issued a W-2.