18. What are the main characteristics of a “limited liability partnership”?
A limited liability limited partnership (LLP) is a special, hybrid entity recognized in most states. The LLP has characteristics similar to a general partnership (GP), but has limited liability protections similar to that of a limited liability company (LLC). The main characteristics of an LLP are as follows:
• Creation & Maintenance – The LLP, like the limited partnership, arises by filing an application with the state Secretary of State’s office. Partners are required to have a LLP agreement. Other requirements may include a description of the business and a certification that the business will obtain liability insurance. The LLP must make routine filing similar to that of the limited partnership. Like the limited partnership, there are very few internal governance requirements.
⁃ Note: States generally restrict the LLP entity to certain professions, such as accountants, attorneys, doctors, or other professional service providers.
• Continuity – The continuity of the LLP is similar to that of a general partnership. Since there must be a LLP agreement, it normally outlines the process or procedure for dissociation by any partner. In the absence of provisions covering dissociation from the LLP agreement, the default limited partnership rules apply.
⁃ Note: Under certain conditions, the dissociation by a partner may give cause for other partners to dissociate. Further, dissociation of a partner may give rise to dissolution of the entity.
• Ownership – The partners own an interest in the LLP as outlined in the LLP agreement. Like a GP, the agreement can allocate ownership in any manner. Further, it can make special allocations of profits and losses, subject to similar tests for economic significance.
• Control – Similar to a general partnership, and unlike a limited partnership, each partner in an LLP has the authority to control and act on behalf of the LLP. The LLP agreement may designate partner seniority and managing partners who control the administration functions of the LLP.
• Limited Personal Liability – Each partner receives personal liability protection with regard to the actions of other partners, employees, or other agents of the LLP. Specifically, the personal assets of each partner are protected from liability from the actions of others. This relationship allows the partners to enjoy the freedoms and lack of formality associated with a LLP while also taking advantage of limited personal liability protection. As with other forms of partnership, the LLP entity is responsible for the debts and obligations of the LLP. This includes responsibility for the tortious actions of any partner, employee, or other agent of the business.
⁃ Note: A partner (in any type of partnership) is always personally liable for her own actions. Some states limit the liability protection of limited liability partners to negligence actions. In such cases, the other partners are still personally liable for debts of the LLP and intentional conduct of other partners. LLPs are often created specifically to protect partners from liability for the professional malpractice of other partners.
⁃ Example: Carter and Aly are architects and partners in an LLP. Carter works on a large building project and drafts a very poor design. The building is not structurally sound and collapses. Several individual are injured and sue the LLP. The LLP will be liable for any judgment rendered against it. Further, Carter may be held personally liable for his negligent performance. Aly, however, is not personally liable for the debts of the LLP or Carter. While the value of her interest in the LLP may be reduced because of the obligations of the LLP, her personal assets are protected.
• Compensation – LLP partners are compensated similarly to general partners. Each partner receives a draw of partnership profits. The amount of the draw is either based upon the partner’s percentage of ownership or on a special allocation to that partner.
• Taxation – LLPs are taxed similarly to a general partnership. Profits and losses pass through to the partner based upon her share of the ownership or in accordance with the special allocation provisions of the LLP agreement. Generally, each limited liability partner is treated as a general partner. As such, income received from the LLP business activity is considered active income. This also means that income imputed to the partners is subject to self-employment taxes.
• Discussion: Can you think of a prominent limited liability partnership? Why does the limited liability partnership entity fit well with this business model?
• Practice Question: In a short paragraph, can you describe the primary attributes of a limited liability partnership?