Limited Liability Partnership

LLP stands for limited liability partnership. As the name suggests, an LLP provides its members with a degree of liability protection, shielding them and their personal assets.

• A partner of a registered limited liability partnership is generally not liable: even by way of indemnification, for any debts, obligations or liabilities of the partnership itself or of its other partners," says Alan Goldenberg, tax principal at Anchin, a New York accounting firm. "Accordingly, individual partners are themselves not liable for other partners' misconduct or debt and also are not individually liable for the partnership's obligations or liabilities.
• An LLP is an entity created by state law: . usually used for professional practices, such as legal, accounting or architecture firms, says Michael J. Greenwald, partner and Business Entity Tax Practice leader at Friedman LLP, a New York-based business consulting firm. Different states provide different degrees of liability protection to members.
• Kristin Roberts, assistant program chair of accounting for Post University: identifies two types of LLPs: operating LLPs, where there is a business or service being provided by the LLP, and family or investment LLPs, where there is no product or service. In the latter case, "the LLP is used as an investment tool," she says. "The partners contribute cash and/or marketable securities to the LLP, and in turn the LLP invests those assets further, which could be in marketable securities and/or publicly traded partnerships," or PTPs. In either case, the LLP must be defined by an operating agreement, she says.
• Benefits of Forming an LLP: The primary benefit of an LLP is its limited liability protection. "The liability is limited only to what the partner has invested in the LLP," Roberts says. "This provides a level of protection for the partner against possible creditors of the LLP" and is generally a significant benefit for LLPs operating as a business. With investment LLPs, the benefit is the ability for partners to "pool their resources and perhaps invest in securities and/or PTPs that they may not have been able to invest in on their own," she says. "Since, by nature, there is more than one partner in an LLP, the risks associated with investments are shared by all partners, as are the returns on those investments."
• Drawbacks of an LLP: "Management of the LLP can become a downfall if not handled properly from the start," Roberts says. "Just because someone may own more of the LLP than another partner, this may not flow through to decision-making or daily management." She recommends consulting an attorney to ensure the proper articles of organization and/or management are appropriately adopted. LLP partners may also benefit from hiring a tax accountant for help with filing tax returns. "The tax return for investment LLPs can be very complicated and costly," Roberts says. "It's not as simple as 'number dumping,' which is simply taking the numbers reported on year-end tax statements and putting them directly into tax software to produce a tax return." For LLPs that invest in PTPs and other securities, you must translate the K-1 information from the PTP and investment activity into a tax return reporting on an accrual basis, she says. Other drawbacks to an LLP include the fact that since partners are not employees, they can't take W-2 wages and must pay self-employment taxes, Roberts says. Some retirement vehicles are also unavailable to LLPs.