Limited Liability Partnership (LLP) — Advantages and Disadvantages

A Limited Liability Partnership (LLP) is a business structure that offers some of the advantages of both a
corporation and a partnership. LLPs are popular among professionals such as lawyers, accountants, and
doctors who want to enjoy the benefits of operating as a partnership while limiting their liability for
business debts.

The members or partners are the separate legal entity from LLP. They are only liable for the amount of
money they invest or any personal guarantees they provide. The partnership is incorporated at
Companies House, and can only be used by profit-making businesses.

There are several key advantages and disadvantages of Limited Liability Partnerships to keep in mind if
you consider this business structure for your company.

Advantages of Limited Liability Partnership:

1. Personal liability protection: One of the most significant advantages of an LLP is that the partners have
limited personal liability for the debts and actions of the partnership. If the LLP goes into debt or is being
sued, the partners’ assets are protected.

2. Flexible management structure: LLPs offer a more flexible management structure than corporations.
Partners can agree on various management structures, such as equal ownership and decision-making
power or a hierarchical structure with designated partners having more control.

3. Pass-through taxation: Like partnerships, LLPs are “pass-through” entities, meaning that the
partnership itself is not taxed on its profits. Instead, the partners distribute the profits, and each partner
reports their share of the income (or loss) on their personal tax return.

Disadvantages of Limited Liability Partnership:

1. Difficult to raise capital: One of the biggest disadvantages of an LLP is that it can be challenging to
raise money from outside investors. Because LLPs offer limited personal liability protection, potential
investors may be hesitant to invest in an LLP because they will not have the same control or asset
protection as they would in a corporation.

2. Complexity: LLPs can be more complex to operate than other business structures due to the need to
comply with partnership and corporate laws. It can make LLPs more expensive to set up and maintain
than simpler business structures.
3. Limited life: One of the disadvantages of an LLP is that it has a limited life span. If one of the LLP
partners leaves or dies, the LLP must be dissolved and reformed with new partners. It can be a
significant hassle for the remaining partners and may discourage potential new partners from joining the
LLP.

Examples of Limited Liability Partnership

In certain circumstances, two or more people organize their business as a limited liability partnership to
receive some unique benefits. LLPs are often used by professional services businesses, like attorneys or
accountants. An LLP generally protects partners from each other’s professional legal problems, such as
negligence or malpractice. Liability is limited to the amount of money each partner contributes to the
LLP. States vary as to who can establish an LLP.

Professional Organizations and Licenses

Most states require each LLP partner to have a professional license in a chosen field. Therefore, LLPs
generally include partnerships among physicians, attorneys, accountants, architects, licensed financial
advisers, veterinarians and undertakers. California only allows LLPs for lawyers and accountants.

The “Big Four” accounting firms are represented in the United States by LLPs, as is the world’s largest
law firm, DLA Piper, whose American affiliate is DLA Piper LLP. Doctors and lawyers often form LLPs
instead of general partnerships to protect themselves from the malpractice suits of their partners.

Limited vs. Full Shield

The “limited” part of LLP has different meanings in different states. In some states the LLP structure
provides only a “limited shield.” For example, in those states, a partner would have unlimited personal
liability if he injured a client or sold a defective product while performing LLP business. In all states, the
limited shield means a personal creditor can pursue a claim against a partner not limited to the amount
invested in the LLP. Even in “full shield” states, an LLP does not protect small-business owners to the
same extent as does a limited liability corporation.

Taxes and Assets

Because each state has its own LLP laws, it can be hard to make general statements about this form of
partnership. Many states impose a franchise tax on LLPs and require partners to make provisions for
malpractice suits. For example, in California, law firm LLPs pay an annual franchise tax, and each partner
must have professional liability insurance or guaranty sufficient liquid assets. LLP’s generally pay no
taxes -- partners are personally taxed on their shares of income from the LLP.

Piercing the Veil

In a maneuver called “piercing the veil," creditors and other litigants can hang personal liability on LLP
partners by claiming the LLP is a sham – set up only to defraud creditors or to provide a limited shield to
sole proprietors. Commingling of private and LLP money and property can indicate a sham LLP. The
courts might be reluctant to allow claimants to pierce the LLP veil without compelling evidence. Other
actions that override the limited liability protection of an LLP include: partners personally guaranteeing
LLP loans, failure to pay taxes, failure to carry liability insurance and partners who fail in their duty to act
responsibly when performing LLP work.

LLP or Ltd — which is better?

Apparently, there are many similarities between a limited liability partnership and a limited company.
The purpose of the LLP structure is to promote the growth of partnerships. Also, this structure
encourages ownership of a business and flexibility in management and pay. It offers the combined
advantages of a corporation and a partnership.

LLP, however, is popular among professionals such as lawyers, accountants, and doctors who want to
enjoy the benefits of operating as a partnership while limiting their personal liability for business debts.

Advantages of an LLP include personal liability protection, a flexible management structure, and pass-
through taxation. Quite the opposite, the Disadvantages of an LLP can consist of difficulty raising capital,
complexity, and a limited life span.

Overall, one should carefully consider the advantages and disadvantages of Limited Liability Partnerships
before choosing this business structure. However, if you are confused about which partnership structure
you should adopt — limited or unlimited, you can get help here.

LLPs can offer significant benefits, but they also come with some drawbacks. Therefore, Weighing the
pros and cons will help you decide if an LLP is a right choice for your business.