Limited Liability Partnership: Pros and Cons
An LLP is an unincorporated business owned and run by multiple people whose assets are protected.
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In its simplest form, a general partnership is two or more people owning and operating a business together. But “simple” can come with trade-offs. In a general partnership, partners can be personally responsible for the business’s debts and obligations, and they may also face liability tied to the actions of other partners.
A limited liability partnership (LLP) is designed to limit some of that risk. An LLP may reduce a partner’s personal liability and for claims arising from other partners’ negligence. However, it typically does not shield a partner from liability for their own wrongful acts, including professional malpractice.
What is an LLP?
An LLP is a type of general partnership that gives the partners limited personal liability for the business’s debts and the actions of the other partners.
An LLP may limit a partner’s personal responsibility for some business debts for claims due to other partner’s negligence or misconduct.
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.
LLP: Pros and cons at a glance
| Pros | Cons |
|---|---|
| Partners’ personal assets are protected from other partners’ action and business debt. | Each state has its own regulations. |
| Provides motivation for employees to grow with the company. | Insurance policies can be expensive. |
| Requires less paperwork than LLCs and corporations. | Liability protection has limits. |
Pros of a limited liability partnership
- All partners have limited personal liability. As a partner in an LLP, you’re typically 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.
- 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 of a limited liability partnership
- 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. Professional liability coverage can be expensive in higher-risk fields. On top of that, an LLP may also need general liability and other policies, which can add to ongoing operating costs.
- Liability protection has limits. LLPs reduce personal liability, but doesn’t eliminate it. In most states, partners are personally responsible for their own wrongful acts, including professional negligence or malpractice. Depending on state regulations, partners may also still face personal exposure for certain business debts or obligations.
How to form a limited liability partnership
1. Register with your 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.
2. Get an employer identification number
You should get an EIN, a nine-digit number assigned to businesses for tax purposes.
3. Create a partnership agreement
An partnership 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.
4. Get the proper licenses and permits
Your business may need certain licenses and permits to operate legally, depending on your state, locality and industry.
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