A limited liability partnership [LLP] is one of several options that are available to you today when you’re looking to form a business. This structure requires 2 or more people to own the business in question. While operating under this structure, there are a number of advantages that can be obtained, but the partners must also be aware of the disadvantages which are also present. By evaluating each key point, an LLP can beat the odds and thrive as a business entity.
What Are the Advantages of a Limited Liability Partnership?
1. There is a lower level of overall liability assigned to the owners.
There’s a reason why this business structure is described as having “limited liability.” Not only do the multiple owners help to spread out any one person’s individual liabilities to the company, the structure also protects many of the personal assets that each owner has. The only exception to this rule would be if an individual owner put personal items up for collateral to obtain business funding.
2. There isn’t a limit placed on the number of owners.
Unlike other business structures, an LLP allows for an unlimited number of owners that can be personally involved with the business. Should something unforeseen occur with the business, each additional owner involved helps to lessen the overall liability stake that each owner has. There is also only one class of partner in this structure.
3. Each owner has flexibility to act as they wish.
Some business structures require owners to have a specific equity stake or be involved in certain ways with their business. That’s not necessarily true with the LLP. Each individual partner can contribute as much or as little to the daily operations as they wish. There is no obligation to attend meetings, consult with others, or have an active role. Their equity in the company secures their place.
4. There are business tax benefits to the LLP structure.
It is the individual partners who own the business that have to file taxes each year with this business structure. The actual partnership which has formed to create a business identify does have to file taxes as a business. That financial benefit can help the LLP use its funds to find ways to grow.
What Are the Disadvantages of a Limited Liability Partnership?
1. An LLP structure is not recognized by every jurisdiction.
Where you live will determine whether or not you can create an LLP for your next business. In the US, it is not a recognized business structure in every state. Even if you do form this partnership in a region which allows it, some states in the US have laws on the books which will prevent your company from conducting business within their borders. There can be several legal loopholes to navigate that aren’t necessary with other business structures.
2. It can limit customer influence.
When looking at the credibility of business structures, the most reliable structure tends to be a corporation. An LLP fits somewhere between that and a sole proprietorship in the eyes of many customers. Some customers may not even think of an LLP as a credible business since its activities are restricted in some areas around the world. This can make it difficult for the individual partners to find the levels of success they’d like to have.
3. There can be business tax consequences.
Although there aren’t business taxes that are generally assigned to an LLP, the formation fees and licensing can be several thousand dollars in some jurisdictions. Some areas also levy additional personal taxes on individual partners when they are involved with an LLP. Before deciding on this structure, it is ideal to check on what your tax responsibilities would be to see if they would be problematic for your current finances.
4. The personal protections offered by an LLP may not be as comprehensive as a corporation.
The amount of liability a partner faces in an LLP depends on local laws. Some LLPs are treated almost as if they were corporations. Others will only limit personal liability due to the negligence of a partner. Most areas have common ground between these two extremes, making a partner only liable for their own personal negligence.
The limited liability partnership advantages and disadvantages must be carefully evaluated before deciding on this business structure. Everyone is a general partner, but everyone also has certain responsibilities that must be fulfilled. Take a closer look, perform your due diligence, and you’ll be able to find out if this structure is right for you.