Key takeaways
The question isn't if you'll start a business, but how you'll structure it. With 54% of aspiring entrepreneurs eyeing a business launch this year, according to QuickBooks' Entrepreneurship in 2025 report, making the right choice is critical.
This guide will unpack everything you need to know about LLPs, from understanding how they blend partnership flexibility with corporate-level liability protection to navigating the steps of formation.
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A Limited Liability Partnership (LLP) is a business structure that combines the operational flexibility of a traditional partnership with the limited liability protection typically associated with corporations. It is particularly well-suited for licensed professionals like lawyers, accountants, architects, and doctors who wish to collaborate while mitigating personal financial risk.
The magic of an LLP lies being flexible like a traditional partnership while offering limited liability.
An LLP allows professionals to collaborate and run a business together, but with an important difference—partners are not typically held personally liable for the mistakes or negligence of their fellow partners. This means if one partner makes a costly error, the others are usually protected, shielding their personal assets from potential lawsuits or debts.
Unlike a general partnership where all partners are jointly and severally liable, in an LLP, liability is generally limited to each partner's actions and investments. This protection is a major draw for professionals like lawyers, accountants, and doctors.
Operationally, an LLP functions much like a general partnership. Partners agree on how to run the business, share profits and losses, and make decisions together. This is usually formalized in a partnership agreement, which outlines the roles, responsibilities, and profit-sharing arrangements of each partner.
From a tax perspective, LLPs are typically pass-through entities. This means the business itself doesn't pay income tax. Instead, profits and losses are distributed to the partners, who then report them on their individual tax returns. This avoids the double taxation that corporations often face.
Establishing and operating an LLP involves meeting several specific legal, administrative, and professional prerequisites. These requirements primarily ensure legal recognition, regulatory compliance, and operational clarity for the partnership structure.
Here are the key requirements for forming and maintaining an LLP:
Fulfilling these requirements is crucial for establishing the LLP structure correctly and maintaining its limited liability protections. Because regulations vary significantly, thorough research of your specific state's laws and consultation with legal or business advisors is strongly advised.
While both LLPs and limited partnerships (LPs) are partnership structures, they diverge significantly in their liability distribution and management roles, catering to distinct business objectives.
In an LLP, all partners benefit from limited liability. This means each partner is primarily liable for their actions and is generally shielded from the negligence or misconduct of other partners, as well as the partnership's overall debts.
This structure is particularly advantageous for professional service firms, such as legal or accounting practices, where partners seek to collaborate while mitigating individual financial risk.
Conversely, an LP features two tiers of partners: general partners and limited partners. General partners assume active management responsibilities and bear unlimited personal liability for the partnership's obligations.
Limited partners, on the other hand, are passive investors who contribute capital but do not participate in management. Their liability is limited to their investment. This structure is commonly employed in investment vehicles, including real estate and venture capital funds.
Consider the long-term implications of management structure. An LP's rigid separation of management and investment can create internal friction if the business direction shifts. An LLP's collaborative model might offer more adaptability in the long run.
LLPs and limited liability companies (LLCs) are both popular business structures that offer limited liability, but they cater to different needs and have distinct characteristics.
An LLP is primarily designed for professionals, such as lawyers, accountants, or architects, who want to operate as a partnership while limiting their personal liability for the misconduct of their partners. In an LLP, partners are generally liable for their own actions and the actions of those they directly supervise, but not for the negligence or malpractice of other partners. This structure emphasizes professional collaboration and shared management among partners.
An LLC, on the other hand, is a more versatile business structure that can be used by a wide range of businesses, not just professional service firms.
LLCs offer limited liability to their members, protecting their personal assets from business debts and obligations. LLCs provide flexibility in management structure, allowing members to choose between member-managed or manager-managed operations. Furthermore, LLCs offer flexibility in taxation, allowing members to choose how they want the business to be taxed.
If you anticipate needing external investment or a public offering, an LLC's flexibility in membership and ownership structure may be more advantageous than an LLP's strictly partnership-focused model.
Forming a limited liability partnership (LLP) offers several compelling advantages, particularly for professionals seeking to collaborate while mitigating personal risk. Here's a look at the key benefits:
One of the primary draws of an LLP is the significant liability protection it offers. Partners are generally shielded from personal responsibility for the business's debts and, crucially, for the negligence, malpractice, or misconduct of other partners. This shields their personal assets (like homes, cars, and savings) from lawsuits or creditor claims arising from their colleagues' actions or overall business liabilities they didn't directly cause. Liability is typically confined to a partner's own actions and their investment in the firm.
LLPs are typically treated as "pass-through" entities for tax purposes, which simplifies tax obligations considerably. The business itself does not pay corporate income tax. Instead, the partnership's profits and losses are "passed through" directly to the individual partners, who then report their share on their personal income tax returns and pay taxes at their individual rates. This structure avoids the "double taxation" often faced by traditional C corporations, where profits are taxed first at the corporate level and again when distributed to owners as dividends.
Unlike some other business structures, an LLP allows for significant flexibility in how the business is managed. Generally, all partners in an LLP have the right to participate actively in the management and decision-making processes of the business. This facilitates collaborative control and a shared approach to running the firm, contrasting sharply with limited partnerships (LPs) where limited partners are typically passive investors with no management rights.
Operating as an LLP can enhance a firm's professional image and credibility, especially in fields like law, accounting, architecture, and medicine where this structure is common and well-regarded. Adopting the LLP structure can signal a commitment to professional standards and stability, potentially building greater trust with clients, suppliers, and financial institutions. In some jurisdictions or professions, it may even be the standard or preferred entity type.
LLPs offer partners considerable freedom in defining their internal operating rules and governance. Through a comprehensive partnership agreement, partners can tailor the structure to their specific needs. This agreement can precisely outline capital contributions, profit and loss distribution methods, partner responsibilities, voting rights, procedures for admitting new partners, and protocols for partner departures or dispute resolution, creating a bespoke operational framework.
While LLPs offer significant advantages, particularly for professionals, potential drawbacks and limitations should be considered before choosing this structure.
Here are some potential disadvantages associated with LLPs:
Carefully weighing these potential disadvantages against the benefits, particularly in the context of your specific state's regulations and the long-term goals of the partnership, is essential. Consulting with legal and financial professionals is recommended to navigate these potential challenges effectively.
Limited Liability Partnerships are typically utilized by businesses that provide licensed professional services, where collaboration among peers is common. The structure allows these professionals to operate as partners while managing the personal risk associated with the actions of other partners.
Here are common examples of businesses that frequently operate as LLPs:
Essentially, any professional service group where partners hold individual licenses and want partnership flexibility combined with liability protection might consider the LLP structure. The key factor often depends on whether state statutes permit that specific profession to form an LLP.
While a limited liability partnership (LLP) offers numerous benefits, it's essential to carefully consider several factors before deciding if this structure is right for your business.
Forming an LLP involves specific legal and operational requirements that you should thoroughly understand, including:
While an LLP offers substantial benefits, it's imperative to conduct thorough research and seek professional advice before making a decision.
LLP taxation in the U.S. centers on pass-through treatment, meaning income is taxed at the partner level, not within the LLP entity itself. This approach contrasts sharply with traditional C corporations.
Here's a brief overview:
In essence, LLPs offer simplified federal taxation compared to C corps, but partners must manage their individual income and self-employment tax obligations. Given the complexities, consulting a tax professional is strongly advised.
Forming a limited liability partnership (LLP) requires careful attention to specific steps to ensure legal compliance. Here's a guide to help you through the process.
Some states limit the type of businesses that can form a limited liability partnership (LLP). For instance, states such as California, Nevada, and New York generally only permit specific licensed professionals, like attorneys, accountants, or architects, to establish LLPs.
Other potential state limitations might dictate that all partners must be licensed in the same profession within that state. Because rules vary widely and can change, verify the current, specific limitations and eligibility requirements for LLPs in your state, usually through the Secretary of State's office, before spending valuable time and resources applying for LLP status.
If you decide to name your business anything other than your name, your state and/or county may require you to register a “Doing Business As” (DBA) name.
Your proposed business name must be distinguishable from other businesses in your state. Search your state’s Secretary of State office’s database to see the availability of your proposed business name. Some states also restrict certain words from being in your name. A list of these words can be also obtained through your Secretary of State office.
Be sure to check with the U.S. Patent and Trademark Office to make sure your name doesn’t violate any registered trademarks.
Some states may allow you to reserve a name during processing and before the adoption of a proposed name. Reservation terms vary from state to state, and the terms can be verified by your local Secretary of State office.
Most states require the inclusion of “Limited Liability Partnership,” “LLP” or another related abbreviation at the end of your fictitious business name.
Don’t forget to check for available web domain names and social media handles— securing these assets now prevents future headaches and ensures consistent branding as your business grows.
While not mandatory in all states, a limited liability partnership agreement is highly recommended. This agreement should define each partner’s role and responsibilities. It should detail the partners’ assets and liability limitations. The agreement should also outline capital contributions, distribution of profits and losses, buyout agreements, and rules for the addition of new partners.
Most states require all business entities to maintain a registered agent in the state. The registered agent must be an individual or company authorized to conduct business in the state in which you applied for LLP status. The agent must have a physical address in the state.
If your business is physically located in the state to which you’re applying, the company may act as its own agent.
When choosing your registered agent, consider a service that provides digital document management—his ensures you have instant, organized access to legal notices.
Whereas the drafting of an LLP agreement is optional, filing for a Certificate of Limited Liability Partnership (sometimes called a Certificate of Registration as a Limited Liability Partnership) is mandatory.
The Certificate of Limited Liability Partnership is a more generalized form than a Limited Liability Partnership Agreement. The application for the certificate requires the listing of your business name and address, the names and contact info of your partners, information on your registered agent, etc.
Filing fees range anywhere from $50 to $100.
An Employer Identification Number (EIN) is a nine-digit number issued by the IRS to classify a business for tax purposes. Sometimes referred to as a “Federal Tax Identification Number,” an EIN is required to open business banking accounts, to hire employees, or to make business transactions.
To apply for an EIN, file an IRS Form SS-4.
In addition to an EIN, some states also require a state ID number.
Like the EIN, the state ID number helps classify a business for tax purposes. If required, they are available through your state’s Department of Revenue.
Federal, state, and local authorities require permits and/or licenses for specific companies to lawfully operate. These include occupational and trade licenses, zoning and health permits, as well as other requirements.
The U.S. Small Business Administration has a useful database with lists of federal and state business licenses and permits on its website. Information on required county and town permits can be found at your local County Business License Office or City Hall.
When researching required permits, don't overlook "silent" regulations. Some local zoning ordinances, for example, might restrict client traffic or signage in unexpected ways.
Some states require Limited Liability Partnerships to purchase specific insurance plans.
Some states require workers’ compensation insurance for all businesses applying for a limited liability partnership. Other states also require malpractice liability insurance for LLPs to satisfy potential claims. Proof of adequate assets to cover this liability may be substituted for insurance in select states.
For more information on insurance requirements for your state, contact your local Secretary of State office, or Department of Industrial Relations. The offices can also help you locate insurance providers in your state.
A small number of states require businesses to publicize LLP formation. An example of this is New York’s publication requirement.
The state of New York requires a detailed notice of formation to be published in two newspapers in the county in which the LLP is located. The notice must detail your business’ name, formation date, location, its registered agent, and business description.
An Affidavit of Publication must then be acquired from the newspaper and sent to the Department of State office.
While this can be expensive and may sound arbitrary, keep in mind that failure to comply with your state’s publication requirement may result in the loss of liability protection.
Your Secretary of State office can inform you of any publication requirements in your state, and your local county clerk can direct you to the publications needed to fulfill this requirement.
The formation of a limited liability partnership (LLP) presents a valuable opportunity for professionals to collaborate and benefit from liability protection.
However, navigating the complexities of state-level regulations and ensuring your business is set up correctly requires access to reliable tools and resources. To help you on this journey, consider the following:
Liability protection can vary significantly between states—consult with your local Secretary of State office and a business-formation attorney.
Forming an LLP can provide professionals with the legal structure needed to collaborate with peace of mind. Utilizing accounting software will help your new LLP stay financially organized from the beginning. LLPs provide a great way to manage risk and allow for pass-through taxation.
Ready to streamline your LLP's finances? Explore how QuickBooks accounting software can simplify your record-keeping and tax preparation.
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