Partnerships are a relatively easy way to establish a business without a lot of start-up costs. It is also a way to create greater borrowing capacity and to provide incentives to high-caliber employees by offering them a partnership. Aside from these advantages and other great attributes, partnerships create liability issues, and that's why many start-ups consider incorporating as a corporation or limited liability company. A limited liability partnership (LLP) merges the benefits of all these business structures. An LLP, however, is not suitable for all business types, thus, is the reason why it is critical to speak to a business law attorney in Texas to make sure the business type you choose is the best choice for your business goals.
What is a Limited Liability Partnership?
A limited liability partnership (LLP) is a business formed by two or more partners that combines the features of both a general partnership, in terms of management, and a corporation, in terms of liability.
Each partner can participate in the management of an LLP while their personal liability is shielded from debts or liabilities arising from the malpractice of another partner.
A partner's personal liability is typically limited to their investment in the partnership. While protecting them from malpractice lawsuits against another partner, an LLP does not protect a partner's personal liability against lawsuits arising from their own negligence.
A more formal structure than a general partnership, an LLP usually requires a written partnership agreement, setting out the operating structure of the partnership as well as how profits are shared.
Common in the professional services industry, the eligibility criteria for LLPs vary between states. As such, it is important to seek professional advice before creating one.
Advantages of a Limited Liability Partnership in Texas
There are basic advantages of an LLP from which many businesses can benefit. The key is making sure the advantages align with your actual business plan and goals.
- Limited personal liability. An LLP is a separate legal entity. In the event of bankruptcy or a lawsuit against the partnership, partners' personal assets are typically protected and limited to their investment in the partnership.
- Flexible management. Under the partnership agreement, partners can choose how management rights and responsibilities are allocated. This can range from passive investment to active involvement in the day-to-day management of the LLP. The partnership agreement also sets out how partners are added or removed from the partnership, including things like retirement. This provides partners with a high degree of flexibility when structuring an LLP.
- Combined resources. LLPs allow partners to pool their resources (financial resources as well as their expertise, experience, and reputation) in the business.
- Reduced costs. LLPs also allow professionals to share the costs of running an independent business (e.g., office hire, equipment, and employees), reducing individual partners' overheads.
- Taxation. An LLP is typically a flow-through entity for tax purposes, meaning its profits (and losses) are passed to the partners who are then personally taxed on them. An LLP does not pay federal corporate taxes, avoiding double taxation.
These advantages need to be weighed against the potential disadvantages of an LLP.
Disadvantages of a Limited Liability Partnership in Texas
As for all business structures, there are always some disadvantages that may impact your business. To fully and proactively address them, a corporate attorney can review and advise accordingly. That said, here are a few of the most commonly held disadvantages of LLPs.
- Not always available. The LLP structure isn't available in every state. Where it is, it may only be available to certain professions or industries.
- More complex to set up and run. An LLP is more complex to set up and run than a sole proprietorship or general partnership. Partners need to formally register an LLP and pay the associated filing fees. An LLP also requires the creation of a formal partnership agreement. In some states, there are also ongoing reporting requirements for LLPs, which can be burdensome.
- Requires at least two partners. An LLP with two partners may have to be dissolved if one partner retires, dies, or otherwise leaves the partnership.
- High insurance premiums. An LLP only protects partners against the malpractice of others; a partner can still be sued for their own negligence. This typically means partners need to take out individual professional liability or malpractice insurance. In some states, an LLP must also obtain separate malpractice insurance. These insurance premiums can add up.
What Types of Businesses Are Best Suited as a Limited Liability Partnership?
Given their limited liability, especially in the event of malpractice, LLPs are useful to professions that rely on reputation. Some states prohibit certain licensed professions from forming a limited liability company (LLC), and so LLPs offer a useful alternative.
LLPs are common in the professional services industry. Examples include:
- Wealth managers
- Medical practitioners
- Real estate agents
In some states, only listed licensed professionals can register as an LLP. If you're considering creating one, you should seek legal advice as to whether it's available in your circumstances.