A limited liability partnership (LLP) is a partnership in which some or all partners (depending on the jurisdiction) have limited liabilities. It therefore exhibits elements of partnerships and corporations.In an LLP, one partner is not responsible or liable for another partner's misconduct or negligence. This is an important difference from the traditional unlimited partnership under thePartnership Act 1890 (for the UK), in which each partner has joint and several liability. In an LLP, some partners have a form oflimited liability similar to that of the shareholders of a corporation.In some countries, an LLP must also have at least one thing called as a "general partner" with unlimited liability. Unlike corporate shareholders, the partners have the right to manage the business directly. In contrast, corporate shareholders have to elect a board of directors under the laws of various state charters. The board organizes itself (also under the laws of the various state charters) and hires corporate officers who then have as "corporate" individuals the legal responsibility to manage the corporation in the corporation's best interest. An LLP also contains a different level of tax liability from that of a corporation.
Why an LLP?
Professionals who use LLPs tend to rely heavily on reputation. Most LLPs are created and managed by a group of professionals who have a lot of experience and clients between them. By pooling resources, the partners lower the costs of doing business while increasing the LLP’s capacity for growth. They can share office space, employees and so on. Most important, reducing costs allows the partners to realize more profits from their activities than they could individually.
The partners in an LLP may also have a number of junior partners in the firm who work for them in the hopes of someday making full partner. These junior partners are paid a salary and often have no stake or liability in the partnership. The important point is that they are designated professionals qualified to do the work that the partners bring in. This is another way that LLPs help the partners scale their operations. Junior partners and employees take away the detail work and free up the partners to focus on bringing in new business.
Another advantage of an LLP is the ability to bring partners in and let partners out. Because a partnership agreement exists for an LLP, partners can be added or retired as outlined by the agreement. This comes in handy as the LLP can always add partners who bring existing business with them. Usually the decision to add requires approval from all the existing partners.
Overall, it is the flexibility of an LLP for a certain type of professional that makes it a superior option to an LLC or other corporate entity. Like an LLC, the LLP itself is a flow-through entity for tax purposes. This means that the partners receive untaxed profits and must pay the taxes themselves. Both an LLC and LLP are preferable to a corporation, which is taxed as an entity and then its shareholders are taxed again on distributions.
How Limited is Limited Liability?
The actual details of a limited liability partnership depend on where you create it. In general, however, your personal assets as a partner will be protected from legal action. Basically, the liability is limited in the sense that you will lose assets in the partnership, but not those outside of it (your personal assets). The partnership is the first target for any suit, although a specific partner could be liable if he or she personally did something wrong.
LLPs Around the World
Limited liability partnerships exist in many countries with varying degrees of divergence from the U.S. model. In most countries, an LLP is a tax flow-through entity intended for professionals who will all have an active role in managing the partnership. There is often a list of approved professions for LLPs, such as lawyers, accountants, consultants and architects. The liability protection also varies, but most countries’ LLPs protect the partner from the negligence of any other partner