A limited liability partnership (LLP) is available as a business entity to only certain licensed professionals, which are public accountants, attorneys, and architects. LLPs are a good alternative to general partnerships, as an LLP provides extended protection from liability that general partnerships do not. A LLP will not work for the sole proprietor looking for protection from liability, as LLPs by definition require two or more business owners in order to register with the California Secretary of State. Using an LLP as your business entity may be preferable over a professional corporation if you and your partners prefer flexibility in operating structure, ease of administration, and a more simple tax structure.
Structuring Your LLP
LLPs are extremely flexible business entities and California regulations allow the partners to customize almost every aspect of the governance and operations of the partnership. The flexibility of an LLP allows partners to structure the partnership in ways such as allowing every partner to participate in the decision making processes equally, regardless of income distribution or seniority, or conversely, the partners can agree to leave the daily decisions to one managing partner, or the LLP can have different classes of partners with different voting rights, and much more! Structuring the partnership to fit the partners needs can be done either by oral agreement or having a written partnership agreement. Our San Diego business attorneys always recommend having a written partnership agreement to ensure that the partnership has a written document to fall back in case of disagreement between the partners. As such, it is extremely important that the business owners take special care in the drafting and execution of the partnership agreement. With so many flexible aspects, it is important to consult a business attorney so that you ensure you receive the most out of your partnership!
The profits and losses of a LLP pass through to each individual partner’s tax return as allocated in the partnership agreement, which is then submitted on Schedule K-1 . This means that there is no additional tax return required to be filed for the individual entity, as with a professional corporation. Each partner reports his/her own share of the partnerships profits or losses on his/her individual tax returns. As previously stated, the allocation of the partnerships profits and losses is governed by the partnership agreement. If there is no partnership agreement, the profits and losses of the partnership are distributed equally among the partners. These are a few of the tax considerations that go into forming a LLP, and it is highly recommended you consult with an expert to ensure a LLP is right for your business!
LLPs offer similar liability protection as professional corporations. This means that you will only be responsible for the wrongful acts of yourself, but not of your business partners or contractual obligations of the partnership. You may still be liable for the negligent acts of employees you supervise, however. There are many aspects in regards to protection from liabilities incurred from operations of the partnership, and ensuring you and your partners are properly protected from liability is extremely important. Allow our experienced business law attorneys guide you through the formation and operation of your limited liability partnership.