Limited Liability Partnership: Pros and Cons

In its simplest form, a partnership is just two or more people getting together to own and run a business. But sometimes “simplest” doesn’t mean “right.” If you and your partners are lawyers and doctors, two professions at high risk for malpractice lawsuits, a limited liability partnership, or LLP, may suit your needs.

That’s because a basic partnership doesn’t protect its owners’ personal assets against anyone demanding payment from the business. An LLP could be the solution to protecting yourself and the other partners. Or at least it’ll get you part of the way there.

What is an LLP?

An LLP is an unincorporated business owned and run by multiple people, all of whom share ownership and management responsibilities. These multiple partners enjoy limited personal liability for the business’s debts and the actions of the other partners.

This is crucial because, despite their efforts to do their jobs the right way, professionals may get sued when their clients aren’t happy with the outcome of their work. LLPs are commonly associated with businesses with licensed professionals, such as attorneys and accountants.

Say you’re a litigator and your clients disagree with your legal strategy, then lose their court case. They could sue you. You’re a doctor, and one of your patients gets seriously injured and dies under your care. Malpractice suit.

Malpractice cases can be costly. As a partner in a law firm or doctor’s practice, you have some control over your own risk for a lawsuit but little control over that of other partners. An LLP insulates your personal assets from others’ actions and the actions of the partnership’s employees.

That said, limited liability has limits. Each partner in an LLP remains personally liable for his or her own professional activities.

Note that an LLP is not the same as a limited partnership; they’re two different business structures.

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LLP: Pros and cons

Pros

• All partners have limited personal liability. As a partner in an LLP, you’re liable only for your own actions and those of the people you directly supervise, not the actions of the other partners or the LLP as a whole. In other words, if the LLP gets sued, your assets, including your home and car, aren’t at stake.

• It’s a good employee motivator. LLPs can have many partners and frequently add new ones. The prospect of one day becoming a partner and gaining partial ownership of the business can be motivating for junior employees.

• They require less paperwork than LLCs and corporations. To form an LLP, you need to register with your state, pay a filing fee and create a partnership agreement. You don’t need to create articles of incorporation and a board of directors, as with limited liability companies and corporations.

Cons

• Regulations vary by state. Every state has slightly different laws regarding LLP registration, which can make it confusing to decide where and how to form one. For example, in some states, including California and New York, you can only form an LLP if you’re a certain type of licensed professional such as an attorney, an architect, an accountant or a physician.

• Pricey insurance policies for partners and the LLP. Since partners are responsible for their own liability, they must each carry individual malpractice insurance. For some medical specialties in some states, premiums have been known to exceed $100,000 per year. The LLP itself also needs insurance; in Massachusetts, for example, LLPs must carry liability insurance for minimum per-claim and aggregate amounts.

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How to form an LLP

• Decide where to register: The requirements for forming a limited liability partnership vary by state, and some states offer more advantages than others. You can find information about specific state filing requirements at the Small Business Administration. If you’re still unsure about where to register your LLP, you can consult an attorney to talk about what state is best for your business based on state business laws and tax codes.

• Register with your chosen state: To form an LLP, you must register with a state agency — usually the secretary of state’s office — and pay a filing fee, which varies by state. For example, in California, it costs $70 to register an LLP, plus a $15 service fee. In New York, the filing fee is $200. When you fill out the registration application, you’ll have to include your company’s name. Many states require that you include “limited liability partnership” or “LLP” in the name.

• Get an employer identification number: You should get an EIN, a nine-digit number assigned to businesses for tax purposes. The IRS requires any business operating as a partnership to have one.

• Create a partnership agreement: An LLP agreement is a legal document that details the terms of your partnership. The agreement should outline the roles of each of the partners, how profits and losses will be divided, how partners can leave the LLP and how the partnership can be dissolved. You can create this document yourself using an online template or hire an attorney to help you create one.

• Get the proper licenses and permits for your business: You’ll need certain licenses and permits to operate legally, depending on your state, locality and industry. Use the SBA's tool to find links to the relevant paperwork you’ll need.

• Publish a notice in a local newspaper: Some states require LLPs to publish a newspaper notice to alert the public of their business’s registration. For example, in New York, LLPs must publish a notice in two newspapers and pay a $50 fee to submit a certificate of publication to the state.

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