LLP

An LLP is a legal business entity that combines the flexibility of a partnership with the liability protection of a limited liability company (LLC). It’s a type of general partnership that limits each partner’s personal liability to their own contributions and actions. In other words, partners generally aren’t responsible for the debts or actions of other partners.

Two or more limited partners generally form an LLP by filing documents with their state’s business agency. Partners typically adopt a partnership agreement outlining each partner's rights, responsibilities, and share of profits and losses.

Requirements vary by state, but LLPs typically file a certificate of limited liability partnership, which outlines basic business information like the company’s name, address, and partners’ names. Once registered, an LLP is treated as a pass-through entity for federal tax purposes. Profits and losses flow to each partner's individual tax return; the LLP itself pays no federal income tax at the entity level.

That said, not all states recognize this structure, and some states only allow certain businesses, such as licensed professionals, to form LLPs. That means that you may need to register your company as a different business structure if you move or expand it into a state that doesn't recognize LLPs.

There are several advantages if you can form your business as an LLP, particularly for professionals or larger partnerships that want more flexibility in how they structure their business. Here are some of the benefits of an LLP:

1. Professional credibility. Some states only allow professional services firms—such as medical practices, law firms, and accounting firms—to operate as an LLP.
2. Tax benefits. LLPs are generally taxed as pass-through entities, meaning they only pay income tax on their personal tax returns, avoiding double taxation.
3. Liability protection. Partners are not personally liable for a co-partner's professional errors or misconduct. Each partner remains responsible for their own wrongful acts.
4. Flexibility. LLPs allow the partners to agree on business operations, such as how to handle profit-sharing and decision-making.
5. State-variable shield. Some states offer "full shield" protection covering all partnership debts; others provide only a "partial shield" limited to co-partner negligence. Confirm your state's rules before relying on LLP status for asset protection.
6. Ongoing compliance. Most states require annual reports and renewal fees. Failure to comply can result in loss of LLP status and exposure to unlimited personal liability.

Common uses

LLPs are most common among licensed professionals who practice together, and many states restrict LLP formation to specific professions by statute. These are the most common examples.

1. Law firms. Partners share clients and overhead without personal exposure to a colleague's malpractice.
2. Accounting firms. CPAs gain protection from liability arising from another partner's audit errors.
3. Architecture and engineering firms. Design professionals collaborate on large projects while limiting cross-partner liability.

LLP vs. LLC and general partnership

An LLC and an LLP are both pass-through entities with liability protection, but an LLC is available to most business owners, while an LLP is typically restricted to licensed professionals. An LLC also permits a single-member structure; an LLP requires at least two partners.

In a general partnership, every partner bears unlimited personal liability for the debts and actions of all other partners. An LLP limits that exposure but requires state registration and ongoing compliance; a general partnership can exist without any formal filing.

LLC vs. LLP

There are several differences between an LLC and an LLP. For example, LLCs can register in any U.S. state, but LLPs may face more restrictions in some states. In terms of liability protection, LLPs may offer more protection. While LLC members generally aren't personally liable for business debts, they are liable for the actions of other members. In an LLP, partners are only personally liable for their own actions.

LLP vs. general partnership

A limited liability partnership (LLP) and a general partnership differ in the liability of the partners. Partners are personally liable for the debts and obligations of the business in a general partnership, while each partner has limited liability in an LLP. Additionally, an LLP is a separate legal entity from its partners, which allows its partners to enter into contracts and own property in the name of the business.

Related terms

An LLP connects to several related business structures that offer liability protection in different forms.

1. Professional LLC. An LLC structure available to certain licensed professionals under state law.
2. Multi-member LLC. An LLC owned by two or more members.
3. Partnership agreement. An internal contract that defines the partners’ rights, duties, and financial arrangements.

FAQs about LLP

Does the liability shield protect a partner from their own mistakes?

No. The shield protects each partner from a co-partner’s negligence or misconduct. Every partner remains personally liable for their own professional errors.

Can a single person form an LLP?

No. An LLP requires at least two partners. Sole practitioners seeking liability protection typically use a single-member LLC or professional LLC instead.

Is an LLP taxed differently than a general partnership?

No. Both are pass-through entities at the federal level. The liability shield is a legal distinction with no effect on how the IRS classifies or taxes partnership income.

What happens if an LLP fails to file its annual report?

Most states treat missed filings as grounds for administrative dissolution, which can strip partners of the liability shield and expose them to unlimited personal liability.

Can an LLP have employees?

Yes. An LLP can hire employees just like other business entities. Employees are not partners and do not share in the ownership, management, or liability protections associated with the partnership unless they become partners.