Professionals considering forming a business entity to protect their personal assets may consider a limited liability partnership as an option. An LLP is one type of business entity for multiple parties going into business together, allowing them to pool their talents and resources in an effort to grow more quickly than they might alone. And while an LLP is an entity that offers benefits to its partners, it isn’t necessarily available to all.
Limited liability partnerships serve a similar function to other business entities, allowing the individual partners involved to shield their personal financial assets and bank accounts from the business debts and obligations they accrue. LLPs differ from other entities in who can make use of it as a business structure; in many states, LLPs are only available to a set list of licensed professions, such as lawyers, architects, and accountants.
Once you believe that an LLP is the right entity for you and your partners, follow these steps for LLP setup, including registering with the appropriate state agency.
1. Determine your eligibility
2. Choose a name and complete a business name check
3. Select a registered agent
4. Create a limited liability partnership agreement
5. File the necessary paperwork with the state
An LLP provides a number of advantages for business owners. In addition to liability protection, LLPs offer a more flexible management structure, allowing the partners to choose how they wish to manage day-to-day operations, without worrying about a board of directors or shareholder formalities.
LLPs also allow partners to pass business income and loss directly through to their personal income tax returns, without any corporate tax payments. This avoids the issue of ‘double taxation’ that corporations frequently have to deal with, which is when personal taxes are levied on income or dividends received by individuals from the company, after the business has already paid corporate income taxes.
Those starting with a general partnership and looking for greater protection against the liabilities of the business may also have an easier time converting to an LLP than to other types of business entities. Although it’s worth checking how limited the limited liability guidelines operate in your particular state.
While LLPs offer considerable benefits and advantages, there are several disadvantages and costs that are worth considering before making a decision. To start, the limitations on who can form the LLP, as well as differences in state laws regarding the liability of partners in certain instances. There’s also practical questions about the ability to run a business as a team; you’ll want to consider:
If the LLP had to be dissolved, that could be problematic and expensive. LLPs also come with ongoing costs. Depending on the state, LLPs may be subject to annual registration fees, reporting, and franchise taxes. Given that many of those forming LLPs are from professions requiring a license, there is also the expense of liability or malpractice insurance to account for, as well as other insurance associated with running any type of business. None of these costs are necessarily prohibitive to forming an LLP, or even starting up a business, but they are worth knowing about before you begin.
Given the similarities in the acronyms, you might assume that LLPs are similar in most regards to a limited liability company (LLC). And while there are commonalities, each differs in important ways. While LLCs can have multiple members, they can also be single person entities, whereas LLPs are, by definition, partnerships of two or more people.
LLCs also have more flexibility for tax purposes, allowing its members to choose pass-through taxation to their personal tax returns or taxation within the LLC as a corporation. In contrast, LLPs are restricted to pass-through taxation, regardless of the partners’ preference. LLCs can similarly choose between a member-managed model or having a manager run the business, while LLPs are managed by the partners in some division of responsibility.
While it’s always smart to inform yourself before beginning the process of setting up a business entity, it’s even smarter to get advice from a legal professional, especially when that advice comes at an affordable price for small businesses.
There are generally four approaches: domestication, foreign qualification, dissolution/formation, and merger. Let’s take a closer look and discuss how you can prepare before the move.
Incorporation is the legal process of turning a business into a “legal person” that’s separate from you. An incorporated business can own property, pay taxes, and sign contracts under its own name.
Your registered agent is your business’s official point of contact, and you need one in every state where your company is formed or registered.
We’ll cover all the steps and even tell you about more things you’ll need to do after your LLC filing in Tennessee.
Your LLC won’t officially exist until the state accepts your Articles of Organization. You’ll need the filed document to open LLC bank accounts, apply for business licenses, and sign contracts.
While this guide gives you useful information about paying yourself from an LLC, it is recommended that you consult with a CPA or an accountant so your LLC is set up with the best tax classification to meet your needs and maintain compliance with IRS regulations.
