A Limited Liability Partnership (LLP) is essentially a combination of General Partnerships (GPs) and Limited Partnership (LPs).
Like a General Partnership, Limited Liability Partnerships permit management rights to partners. While these management rights aren’t afforded to Limited Partners in an LP, an 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/her own debts and obligations resulting from negligence, malpractice or misconduct. However, they are not liable for any debts or obligations of his/her partners.
Like Limited Partnerships, LLPs also avoid “double taxation.” They are not taxed at the business/corporate level and instead are “passed through” to only be reported on their personal tax returns.
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. For example, both California and New York only allow professional firms to file for LLP status.
Be sure to see if there are any limitations on LLPs in your local state before spending valuable time in applying for an unattainable certificate.
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 local 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 attained through your Secretary of State Office.
Be sure to also check with the U.S. Patent and Trademark Office to make sure your name doesn’t violate any registered trademarks. Their Trademark Electronic Search System (TESS) allows you to conduct this search online.
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; 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, expulsion or addition of partners, etc.
4. Designate a Registered Agent
Most states require all business entities to have and 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, it may act as its own agent.
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 more of a generalized form than that of 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.
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 via 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. License123® is also a helpful site to determine what licenses and permits are required for your business.
9. Purchase Required Insurance
Some states require Limited Liability Partnerships to purchase specific insurance plans.
Workers’ compensation insurance is required in some states for all businesses applying for Limited Liability Partnership. Few 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 amount of states require your business to publicize its 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 notices must run for six successive weeks, with one running daily and the other running weekly.
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.
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.