For some, "LLP" might sound like a new slang term millennials use. In business and law, LLP is a well-known term for something much more important.
It's one of the most common abbreviations. Others use it in resumes, business proposals, and company names. Really, what does LLP stand for?
If you're an entrepreneur, lawyer, or just curious about business structures, this article will help you understand and compare LLP.
Let's delve into the meaning behind those three simple letters.
What is LLP?
LLP stands for Limited Liability Partnership. It is a type of partnership in which the partners have limited liability.
Beyond what they have invested, LLP partners are not personally liable for the company's debts and obligations. As a result, it's a common business structure for lawyers, accountants, architects, and consultants.
Texas introduced the world's first LLP in the 1990s for professional service firms to operate with limited liability. It was so popular that other US states eventually passed LLP legislation.
Since then, Canada (1998), the UK (1999), Australia (2000), and India (2008) have adopted LLPs. LLP rules differ per country, but limited liability and partnership structures remain the same.
GP vs. LP vs. LLP: What's The Difference Between These 3 Types Of Partnerships?
GPs, LPs, and LLPs differ in the following ways:
- General Partnership (GP): GPs are partnerships where all partners manage the business and are liable for its debts and responsibilities.
- Limited Partnership (LP): An LP is a partnership where there are two types of partners: general partners and limited partners. General partners manage the business and are liable for all debts and obligations. Limited partners only contribute capital, acting like investors.
- Limited Liability Partnership (LLP): LLP partners are not personally accountable for the partnership's debts and liabilities. Additionally, all partners can take part in the management of the business.
The Legal Structure of LLP
LLPs have the flexibility of partnerships and the limited liability of corporations. Business owners should know these LLP law basics:
- Capital Contributions: Each LLP partner must contribute capital to the business, representing their initial investment. It may change as the company needs evolve.
- Profits and Losses: Profits and losses are split among LLP partners, with the capital contribution (or another arrangement) to determine this. Partners usually pay taxes on their part of profits.
- Management Structure: LLP management structure depends on business needs. In some cases, all partners have equal decision-making power. In others, there's a managing partner that runs daily operations.
The Benefits of LLP
These are the advantages LLP structures have to offer:
- Limited Liability Protection: An LLP protects partners from business debts and obligations. Creditors cannot seize partners' personal assets if the business is in debt.
- Tax advantage. LLPs are pass-through entities, so they don't pay business taxes. Thus all profits are "passed" to the partners and taxed as personal income.
- Partnership flexibility. New partners can join if the partnership agreement allows, and longtime members can leave without disrupting the core operation.
- Easy to form. Most states make forming an LLP easy with minimal paperwork and costs. Just fill out a registration form with the Secretary of State's office. Some states also let General Partnerships become LLPs.
However, LLPs also have some downsides. Due to the limited liability structure, partners in an LLP may have trouble raising funds and resolving conflicts.
The Law and Regulations of LLP
Laws and rules for LLPs differ by country.
In the US and UK, LLPs are separate legal entities. They must follow laws and regulations governing their formation, operation, and dissolution.
In Canada and Australia, LLP legislation varies by province or territory. British Columbia, for example, is also the only Canadian province that does not limit LLPs to professional services.
LLP in Canada also has no legal identity but has some of its features. It can open bank accounts, make transactions with contract partners, etc.
Compare LLP vs. LLC: Which Is Better?
LLP and Limited Liability Company (LLC) are popular limited-liability business arrangements. But some key differences may make one better for certain businesses.
Similarities and Differences
LLP and LLC are both separate legal entities from their owners. They can own property, enter into contracts, and sue or be sued in their name.
Professional service firms often use LLPs, while startups and small businesses use LLCs.
LLPs and LLCs also differ in their tax treatment and management structure. LLPs are taxed as partnerships, but LLCs can be partnerships or corporations.
Advantages and Disadvantages
LLCs are tax-flexible. All LLCs can choose between sole proprietorship, general partnership, and corporate taxation.
An LLC can have many owners and no board of directors. Non-managing members can also invest in LLCs run by a group of managers.
However, LLCs may be subject to more taxes and fees than other business structures (such as sole proprietorships and partnerships).
Compare LLP vs. LP: Which Is Better?
Pass-through taxation allows LLPs and LPs to avoid entity-level tax. Both LLPs and LPs also protect owners from liabilities. Still, there are some differences in how this protection is applied.
Similarities and Differences
With an LLP, all partners are safe from each other's misconduct. In LPs, there are two types of partners: general and limited.
General partners have unlimited liability for the company's debts and obligations. Limited partners, on the other hand, are only liable for the amount invested in the business.
Advantages and Disadvantages
LPs may be superior for businesses that need a lot of outside funding because of their flexibility in ownership structure. LPs also work well for businesses with passive investors who don't want to manage.
Since general partners have unlimited liability, LPs may not be a good fit for those that need liability protection for each partner.
If limited partners in an LP get too active in the business, they risk personal liability as general partners. So, they must stay limited partners by not interfering in business operations, even if they disagree with the general partner.
The Bottom Line
Exactly what does "LLP" mean? You now know that L.L.P. is an abbreviation for Limited Liability Partnership, but that's not all it stands for.
Choosing between LLP, LLC, LP, or any other business structure can be daunting, but it doesn't have to be. Before deciding, consider your business goals, liability concerns, and tax implications.
If you're still not sure, consult with a legal or financial professional to guide you through the process.