 |
 |
Not
a member?
Register Here
———————————
Already a member?
Sign in |
| 
|
Limited
Liability Partnership
What
Is a LLP?
A Limited
Liability Partnership (often called an “LLP”) is
a form of business organization that joins the other more traditional
forms of business organization including “corporations,”
“partnerships,” and “limited partnerships.”
Also added recently has been the “limited liability company.”
(See our pamphlet on LLCs.) Like these other business forms,
an LLP is a legally recognized entity which is organized for
the purpose of engaging in business. The LLP form of business
organization offers certain unique advantages not available
with the other forms of business organization.
Who
can use the LLP?
Two
or more individuals, corporations, partnerships, trusts, or
other entities can join together to engage in business as an
LLP. The owners of an LLP are called “partners.”
Partners essentially own the LLP much in the same way as partners
own a general partnership and shareholders own a corporation.
When an LLP engages in business activities, it is the LLP itself
which actually owns and operates the business from a legal sense.
What
makes an LLP unique?
An
LLP can be organized to combine several of the best features
of the others forms of business organization. An LLC provides
its partners with limited personal liability for the obligations
of the business. With a few exceptions, unless an LLP elects
to be taxed as a corporation, its income is not taxed to the
LLP, but is instead “passed-through” to the partners
and taxed to them at their individual tax rates in the same
manner as the income of a general partnership is taxed. The
LLP form also allows great flexibility to its partners—not
just in terms of who can be a partner and who can manage, but
also in terms of the way the partners are allowed to “share”
the profits, income, and equity of the LLP among themselves.
In addition, a one-time filing of a registration statement with
the State of Wisconsin is all that is required to organize and
maintain an LLP. No annual filings are required. No other organizational
form, except the LLC, can offer all these features simultaneously.
Limited liability: What is it?
Limited
personal liability of the partners of an LLP means that in most
situations the debts and obligations of the business engaged
in by the LLP are not the personal responsibility of the partners—the
debts and obligations of the business can only be paid from
the income and assets of the LLP. Of course, if a business operated
by an LLP has financial difficulties, each partner of the LLP
could lose the amount of his or her investment in the LLP, as
well as the equity built up in the business. Beyond this, however,
no partner risks the loss of his or her other assets and income.
The limitation on the personal liability of an LLP’s partner
works in the same way as the limitation on the personal liability
of the corporation’s shareholders and the LLC’s
members. Limited personal liability is not a characteristic
of all forms of business organization, however. In a general
partnership, each of the partners is personally liable for all
of the debts and obligations of the business of the partnership.
A partner risks not only the loss of his or her investment and
the equity of the business, but also risks loss of his or her
personal assets if the partnership is unable to satisfy its
obligations out of partnership assets.
Tax
Treatment?
LLPs
normally will be treated for tax purposes as partnerships. If
an LLP wishes to be taxed as a corporation, it must affirmatively
elect such treatment. Under IRS Proposed Regulations, LLPs would
automatically be taxed as partnerships unless they elect otherwise.
In most cases, treatment of an LLP as a partnership for tax
purposes will be the desired result. When an LLP is treated
for tax purposes as a partnership it is called a “pass-through”
entity. This is because the income or loss of the LLP’s
business is not taxed to the LLP but instead allocated among
the partners (either in proportion to their ownership interest
in the LLP or in other proportions agreed to by them) and then
combined with the respective partners’ other income and
taxed to them separately on their individual income tax returns.
On the other hand, if an LLP elects to be treated as a corporation
for tax purposes, and not as an S corporation, the income of
the LLP is subject to what is sometimes called the corporate
“double-tax.” The income is taxed once directly
to the LLP and then taxed again when the partners receive distributions
from the profits of the LLP.
Comparison
To S Corporation?
Presently,
many closely-held businesses operate in the form of a Subchapter
S corporation. Essentially, an S corporation is a corporation
that elects to receive special tax treatment. Because it is
a corporation, the shareholders of an S corporation have limited
liability protection. What really makes the S corporation form
of organization popular, however is that is not subject to the
corporate “double-tax.” Instead, an S corporation
is treated for tax purposes more like a partnership, but with
many important differences. Unfortunately, there are many rules
and tax “traps” surrounding the structuring of S
corporations that often limit their usefulness. One advantage
of the LLP’s is that they are not subject to these restrictive
rules. For example, the number and type of investors who can
become shareholders in an S corporation is very restricted.
An S corporation can have no more than 75 shareholders. Shareholders
in an S corporation cannot be partnerships, other corporations,
(unless the other corporation owns at least 100% of the stock
of the S corporation, and the S corporation elects to be a qualified
subchapter S subsidiary), most types of trusts, or non U.S.
residents. LLPs are not subject to these limitations. Also,
the shareholders of an S corporation cannot create different
“classes” of ownership interests. LLP partners,
however can vary allocations of ownership, profit sharing, voting
rights, etc. in ways that allow for great flexibility. There
are also a number of technical tax advantages which members
of an LLP can enjoy when the LLP is taxed like a partnership
which cannot be enjoyed by shareholders of an S corporation.
Whether a business should be conducted as an LLP or as an S
corporation requires the consideration of many factors that
are often technical. Therefore, the decision is usually best
made after consultation with an attorney and accountant.
Comparison
To Limited Partnership?
Limited
partnerships are a specialized type of partnership which consists
of one or more general partners and one of more limited partners.
While the tax treatment of a limited partnership is the same
as that of any other partnership, only the general partners
in a limited partnership have unlimited personal liability.
The limited partners have limited liability for the debts and
obligations of the limited partnership in the same manner as
the shareholders in a corporation. However, there is a key difference
between an LLP and a limited partnership. In a limited partnership,
only the general partners can manage the limited partnership.
This makes partnerships inappropriate as a form of business
organization if all partners wish to engage in the management
decision making of the limited partnership’s business.
LLPs, on the other hand, can be formed so that all partners
can participate in the management process.
Can I Convert My Current Business To Operate As
An LLP?
Any
business can be converted to operate as an LLP. Partnerships,
limited partnerships, and LLCs can be most easily converted—generally
with few, if any negative consequences. An existing partnership
that registers as an LLP remains the same partnership. Corporations
too can be converted—but rarely without negative tax consequences.
Since the tax consequences of any conversion of a business form
can be costly if not done properly, or used in the wrong situation,
consultation with an accountant or attorney prior to the conversion
is always advised.
Is
an LLP For Everyone?
Operation of a business as an LLP may not be appropriate
for all situations. Careful consideration should always be
given to the choice of business organization. The desired
financial and managerial relationships among the investors,
the potential liabilities of the business, and consequences
of various tax treatments are factors which must be considered.
Nevertheless, LLPs will very often be a better choice than
the partnership, limited partnership, or S corporation forms
of business organization.
To
request this form click Here
The data herein has been compiled from various public sources.
The Onyx Group, LP attempts to provide as accurate information
as possible, but is not responsible for actual, consequential
or incidental damages DISCLAIMER: This Web Site is published
for informational purposes only and not to give legal advice,
since legal advice requires application of the law to specific
factual circumstances. Furthermore, due to the ever-changing
nature of the law, this material or portions of it may become
dated or obsolete. Therefore, the authors of this Web site
information disclaim any liability for direct, indirect or
consequential damages resulting from any person’s use
or reliance upon this information. Your review of this information
does not establish an attorney-client relationship between
you and Neider & Boucher, S.C., or any of our individual
attorneys.
| Top of Page |
|
|
|
 |
|
 |
