A Limited Liability Partnership or LLP, may be something you’ve heard about if you intend to start a business. An LLP has features from both partnerships and corporations. You will find in this article valuable information about LLPs such as their pros and cons, what is needed legally, tax rules and much more. After reading this article, you will know if a limited liability partnership is the proper business form for you.

Introduction

A Limited Liability Partnership (LLP) means that partners are only required to pay some company debts. Therefore, if a lawsuit or bankruptcy occurs, the partners’ personal belongings are safe. Just as in a general partnership, an LLP gives limited liability to everyone involved. In most cases, LLPs are employed by law firms, accounting firms and consulting firms. That’s because these companies run the risk of dealing with lawsuits and other legal problems. An LLP provides partners the protection of their own assets along with the perks of working in a partnership.

Advantages of Limited Liability Partnership

The major advantage of LLPs are enumerated below: The Composite Advantage of LLPs – makes the LLP formation a preferable way for businesses. This paper aims at shedding light on the following broad objective which underscores the major advantages of LLP.

• Limited Liability Protection: By limited liability protection, LLPs protect partners’ personal property in circumstances such as the business’s debts or legal crisis.
• Flexibility in Ownership: LLPs provide for relative freedom of organization and ownership because there are no limitations to the number and nationality of partners.
• Easy to Form and Manage: One of the greatest advantages of LLPs is the flexibility of formation and management which less rules than in companies.
• Tax Benefits: Taxation occurs on the partners’ share of profits and therefore less taxation takes place.
• Perpetual Succession: LLPs have the characteristic of perpetual succession and this means that the business formed will carry on with its operations regardless of the withdrawal or death of the partner.
• No Minimum Capital Requirement: Unlike other structures of business, there is no maximum or minimum capital requirement of an LLP stating the capital that can either be brought in by the partners or is required to be paid up.
• Professional Flexibility: These type of business structures are suitable for the working professionals like Lawyers, Doctors and Architects and others may wish to practice together, but independently.
• Easy to Wind Up: It is easy to wind up LLPs as compared to companies and there are many advantages therefore over forming a company.
• No Restriction on Foreign Investment: Like most other structures, LLPs are allowed foreign investments, which makes the structure favorable for companies who want to attract global capital.
• Better Credibility: It is accepted that LLPs are a more credible business structure than the conventional partnerships and the business credibility and reputation are also improved.
• Easy to Transfer Ownership: An LLP can easily transfer the ownership and therefore it is easy to introduce new partners into the business or dissolve it.
• No Dividend Distribution Tax: Different from most companies, LLPs do not incur dividend distribution tax hence unlike usual companies, the partners have to pay extra tax once they share profits.
• Better Risk Management: Professional firms and those attracted to long-term wealth creation chose LLP structures because it offers a better way of sharing risks and minimizing losses.
• Scalability: The structure of LLPs is extremely flexible, and it can expand or smaller depending on certain market conditions, making it suitable for most growing businesses.

All these make LLPs a suitable form of enterprise for the numerous companies that prefer a flexible, adaptable and a tax efficient form of enterprise with limitation of liability.

Disadvantages of Limited Liability Partnership

On this topic of LLPs, it is important to find out that while they have certain advantages, they also have certain disadvantages. Here are some of the main disadvantages of LLPs:

• Complexity: More understood formalities and documents are required to sustain LLPs as opposed to traditional partnerships and Additional operations in LLPs become time-consuming and costly.
• Limited Liability Protection: Although LLPs has provision for limited liability, it is not complete. Contracts might be still unenforceable, or its terms may be void and partners may be still liable for tort such as fraud or negligence.
• Lack of Flexibility: An LLP is run under partnership agreement which is rigid and can seldom be altered. This can reduce the capacity of partners to aligned themselves to new conditions.
• Tax Complexity: LLPs are regarded as partnership business and, as such, they face certain difficulties in the sphere of taxation, if, for instance, there are different type of partners within the LLP.
• Limited Access to Capital: LLPs maybe restricted in terms of funding since they cannot be floated; they cannot float shares to the public to get funds.
• Limited Transferability of Ownership: One of the disadvantages of an LLP is that the ownership interests are not easily transferable hence partners can easily be locked out of the business.
• Dispute Resolution: Owing to the principle of mutual cooperation, conflicts of interest often arise in LLPs and soliciting professional legal opinion to resolve such disagreements is usually cumbersome and expensive.
• Limited Brand Recognition: There are often no branded associations connected with an LLP, which may limit its ability to attract the client’s attention and obtain investment.
• Regulatory Compliance: These regulation and compliance mean that LLPs are bound by some regulation and this can be draining on their time and pocket.
• Limited International Recognition: Because LLPs may not be acknowledged in each country they may face certain restrictions on their ability to operate cross-nationally.
• Limited Access to Government Contracts: The legal structures of LLPs can also restrictsome of the formal contracts it can bid for or participate in as a government tendering company.
• Limited Ability to Raise Debt Capital: In respect of debt financing, LLPs may find it very challenging because partners may be reluctant to lend money to a partnership firm.
• Limited Protection for Minority Partners: While forming an LLP, partners do not get the same measure of protection like that of corporate houses and this often results in strife related to affairs of the company.
• Limited Ability to Go Public: The major disadvantage of LLPs is that they cannot offer their shares to the public, which can put a dampener on their prospects of expanding sources of financing and gaining greater recognition.
• Limited Professional Liability Protection: That is, although LLPs will limit liability of members and the business entity created by the LLP itself, an LLP may not afford the same degree of professional liability protection as do PCs and PLLCs.

However, these demands need to be balanced with all the benefits of LLPs, and the nature of your business must be considered.

How to form a Limited Liability Partnership

• There are a number of steps needed to start an LLP. Before anything else, the partners select a name and check if it exists on the state’s list of business names. Then, they should register their vehicles and pay the required state fees.
• In the second step, they need to write a partnership agreement. The agreement defines what each partner may and may not do and how the business will be managed. Every partner needs to sign the partnership agreement which must be delivered to the state.
• In addition, partners should ensure they have all the licenses and permits needed to run their enterprise. This might consist of a business license, a professional license or a license to run a business at a specific place.

Legal requirements for a Limited Liability Partnership

• LLPs are required to meet certain laws. To begin with, each year the partners are required to file an annual report with the state. The report will mention the business name and address, the partners involved and details of the company’s finances.
• Also, LLPs are responsible for storing documents such as financial statements, the partnership agreement and tax returns. They should be maintained for a predetermined time and the state can ask for copies of them at any time.
• LLPs also have to meet all state or federal laws that relate to their activities. They may cover requirements for getting a license, labour rights or protecting the environment.

What each partner can and must do within a Limited Liability Partnership

• A LLP is regulated by a partnership agreement that lists what each partner may and may not do. The agreement will usually detail the way profits are divided, decisions about controlling the business are made and problems are solved.
• All partners in an LLP are required to work in the company’s best interests. You need to be honest, fair and open when doing so. Both partners must state any personal conflicts of interest and stop any actions that might harm the company.

Taxation of Limited Liability Partnerships

• LLPs do not get taxed twice. Profits from a business are only subject to the partners’ personal income tax rate. All partners are required to report how much they earned or lost as part of their tax expenses.
• LLPs have to pay self-employment taxes which only self-employed individuals are required to pay. The partners owe self-employment taxes for the profit that they earn in the LLP. To prevent penalties and charges, it is necessary for LLPs to have correct financial records and send their tax returns on time.

Conclusion

Ultimately, a Limited Liability Partnership registered with the help of LLP consultants offers businesses many perks such as limited liability and almost no restrictions on managing the business. But it is unlikely to meet the needs of businesses that want to issue equity or become listed on a stock exchange. It’s a good idea to seek advice from a lawyer or accountant before launching an LLP to make sure it will work for you. In this way, you’re able to determine which course of action is best for your business going forward.

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