ComplianceLegalFebruary 04, 2021

Starting a limited liability partnership

A limited liability partnership is a unique option for professionals in certain states, but the protection that it offers to the partners varies from state to state.

When compare-types-of-partnerships-lp-llp-gp, you may want to consider the limited-liability-partnership (LLP). The LLP is similar to the limited-liability-company, but there are some significant differences. Note that an LLP is technically a partnership, so there must be at least two partners.

In many states, owners of an LLP have only a reduced form of use-your-business-structure-to-limit-liability from the claims of the business's creditors. This "limited shield," as it is sometimes called, does not afford the owners the same protection they would enjoy in either the LLC or the c-corporation.

In addition, in many states, the business interests of the owners of an LLP are afforded less protection from the claims of the owners' personal creditors, as compared to the LLC.

Finally, California and New York limit the use of LLPs to professionals, thus eliminating the LLP as a choice for other business owners.

In the past, many professions were not allowed to incorporate, preventing the use of a corporate shield that would limit personal liability. The LLP permits older professional partnerships to transition to limited liability status without tax consequences, and without having to incur the costs associated with transferring assets from the old partnership to the new LLP.

The conversion process from a general partnership to an LLP is unique in the law. The general partnership simply registers as an LLP. Technically, the old entity does not dissolve, and a new entity is not created. The old entity continues to exist, but is now subject to a new set of laws (i.e., those governing the LLP). The conversion does not trigger a taxable event because there is no change in the entity. Moreover, because of this registration process, none of the assets needs to be re-titled, making the conversion especially simple and inexpensive.

The LLC vs. the LLP

An LLP is not the same form as an LLC. Important differences generally make the LLC a better choice for the small business owner.

While the owners of both an LLC and an LLP have limited liability from the claims of the business's creditors, in many states the quality of the limited liability is less for an LLP. Since your business entity does not have to be created in the same state in which you reside or do business, it's best to avoid creating an LLP in one of these states.

Other states afford the LLP the same "full shield" protection as that enjoyed in the LLC and corporation. The trend among the states is in the direction of affording full shield protection.

Personal creditors. In many states, the business interests of the owners of an LLP are afforded less protection from the claims of the owners' personal creditors, as compared to the LLC. Specifically, an LLC can be formed in a state that protects the owner's business interest against the claims of his personal creditors. This is not possible with the LLP, as no state affords this protection to LLP owners.

Insurance. Where professionals operate in the LLP form, many states impose mandatory insurance requirements on the owners.