Structuring

How to form a Limited Liability Partnership

A Limited Liability Partnership (LLP) is essentially a combination of General Partnerships (GPs) and Limited Partnership (LPs).

Like a General Partnership, Limited Liability Partnerships allow partners to manage the business. Limited Partners in an LP cannot take on management responsibility. The LLP allows partners to enjoy the liability protection and tax benefits of a Limited Partnership.

LLPs are particularly beneficial to firms engaged in the legal, medical, accounting, engineering or architectural professions. A partner in an LLP is personally liable for his or her own debts and obligations resulting from negligence, malpractice or misconduct. However, the partner is not liable for any debts incurred or acts performed by other partners.

Like Limited Partnerships, LLPs also avoid “double taxation.” Profits are not taxed at the partnership level and instead are “passed through” and reported on the partner’s personal tax return (Form 1040).

Limited Liability Partnerships are regulated at the state level, and as such, the process to LLP formation varies. There are, however, basic steps that all states require to form a Limited Liability Partnership. Follow along as we guide you through these steps.

1. Verify qualification status

Some states limit the type of businesses that can apply for LLP status. Several states only allow professional firms to file as LLPs.

Verify if there are any limitations on LLPs in your state before spending valuable time in applying for LLP status.

2. Pick a name

If you decide to name your business anything other than your personal 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.

3. Draft a Limited Liability Partnership Agreement

While not mandatory in all states, a Limited Liability Partnership Agreement is highly recommended.

A Limited Liability Partnership 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.

4. Designate a registered agent

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.

For more information on registered agents, visit LegalZoom.com; they can also provide  agent services  for businesses in all 50 U.S. states.

5. File a Certificate of Limited Liability Partnership

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.

6. Register for an Employer Identification Number

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.

7. Obtain a state ID number

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.

8. Obtain required licenses and permits

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 their website. Information on required county and town permits can be found at your local County Business License Office or City Hall.

9. Purchase required insurance

Some states require Limited Liability Partnerships to purchase specific insurance plans.

Some states require workers’ compensation insurance for all businesses applying for 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.

10. Manage publication requirements

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 a 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.

Tools and resources to move forward with an LLP

The formation of a Limited Liability Partnership is a good way for professionals to practice with partners while enjoying some liability protection. But, keep in mind that as an entity regulated at the state level, the liability protection can vary.

Be sure to check with your local Secretary of State office to determine how much liability protection an LLP can provide. A good business-formation attorney can help you decide if LLP formation is in your best interest. The IRS also has a useful database of links and information on doing business in all 50 states and the District of Columbia.


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