What is a limited liability partnership? Limited liability partnerships (LLP) were initially developed in Texas as a response to the liability faced by partners of legal and accounting firms for failures of the savings and loan associations. An LLP could be considered a form of a general partnership. Under the legislation creating the LLP, an LLP can permit general partners to limit their liabilities for those partners that did not participate in the wrongdoing that brings liability upon the partnership.
Thus, the LLP shielded partners and protected these partners from the liability they would face as partners for the improper conduct and actions of other partners or of the partnership. You can compare this to shareholders in a corporation as the most a partner in an LLP could lose would be his or her investment in the firm.
This concept of limiting liability spread quickly and now, I believe, most every state recognizes an LLP. You can elect LLP status relatively easily. A general partner will file a statement with the appropriate state office (maybe the Secretary of State) electing LLP status. Some states may call an LLP a registered LLP because the partnership must register with the state. The business must state “LLP” or “Registered Limited Liability Partnership in it’s name. Additionally, some states may require an LLP to carry a certain amount of insurance or maintain a certain value in partnership assets. The failure to maintain this threshold can cause the entity to lose its limited liability status.
Most statutes do not afford limited liability to the partner or partners who committed acts of negligence or malpractice. However, the LLP statutes brought along the idea that a partner in a general partnership can have limited liability, and thus in some form or fashion these partners begin to look like shareholders in a corporation whereby they are owners, but not liable for debts. However, unlike a shareholder, a partner can have full rights of management in terms of managing the partnership.
Although, a partner is not liable for the debts or torts of the LLP (if not caused by their negligence etc) it is important and practical to note that most loans or lines of credit will need to be personally guaranteed by one or more partners. Thus, a partner in the LLP may be liable for a debt because they have personally guaranteed the note.
An LLP will be taxed as a partnership by filing Form 1065, which is the income tax return filed by partnerships. Speak with a Denver business attorney or tax attorney at The McGuire Law Firm if you have questions regarding the formation of your business, your current entity structure or other business and tax matters.
