Limited Liability Partnership Overview What is a Limited Liability Partnership?

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 separate 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 in much 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 other forms of business organization. An LLP 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 partners 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. LLPs must elect to be taxed as regular corporations. 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 is 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 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 to the partners as part of their individual income when they receive distributions from the profits of the LLP.

Comparison to S Corporation

Presently, many 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 it 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 LLPs 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, 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 partners 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 highly 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 or 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 partner(s) can manage the limited partnership. This makes limited 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. LLP's, on the other hand, can be formed so that all members can participate in the management process.

Comparison to Limited Liability Company

The limited liability company ("LLC") is the second newest form of business entity and similar to the LLP. Both entities receive flow-through tax treatment unless they choose otherwise. Both entities generally have limited liability for all owners, but the liability shield for an LLC may be slightly broader. An advantage of LLPs over LLCs is that fewer formalities are required. Also, a transfer of real estate to an LLP is exempt from the real estate transfer fee. However, LLCs may be used where there is only one owner, and LLCs may be managed by non-members while no comparable provision appears for LLPs. These advantages make the LLC a more attractive form when available.

How Do I Organize And Operate An LLP?

The organization and operation of an LLP is governed by Chapter 178 of the Laws of the state of Wisconsin . An LLP is organized by the filing of a registration statement with the Office of the Wisconsin Department of Financial Institutions along with the required $100 filing fee. The registration statement must include certain information. Once the statement is filed, no other filings with the state are necessary unless the LLP changes its name or otherwise amends its statement. Once organized, there is no requirement that an LLP have a written partnership agreement. However, a written partnership agreement is desirable to document important managerial and financial agreements among the partners. A partnership agreement allows the partners some flexibility to operate the LLP (as to some matters) in ways which would not be permitted by law without such an agreement. A partnership agreement may address matters such as management of the LLC, distribution of profits and losses, allocation of taxable income and loss, transfer of partners' ownership interests in the LLP, and termination of the LLP. If an LLP does not have a written partnership agreement, or such partnership agreement does not cover a particular matter, then the LLP must be operated strictly in accordance with the rules concerning LLPs established by Wisconsin law.

Can I Convert My Current Business To Operate as an LLP?

Any business can be converted to operate as an LLP. Partnerships and limited partnerships can be most easily converted--generally with few, if any, negative tax consequences--because 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 the 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.

Limited Liability Company (LLC) Overview

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