What is a Limited Liability Partnership?
An LLP is a form of business that allows partners to enjoy limited liability, whereas general partners have to contend with unlimited personal liability.
You may have noticed that LLPs have become common. Your accountant and lawyer most probably have the LLP acronym as part of their business names.
A Limited Liability Partnership must have a partnership agreement done in writing. It is also mandatory for annual reports to be prepared and presented to the major stakeholders.
Is there any difference between a LLP and a GP?
There are a number of similarities between Limited Liability Partnerships and General Partnerships. The major difference is that the former has two distinct classes of partners. In a typical LLP, general partners have absolute control as well as management of the business. However, they also have to accept absolute personal responsibility for liabilities.
Limited partners do not have any personal liability further than their investment. Additionally, they cannot take part in the day-to-day operations or overall management of the enterprise. If they decide to take part in the day-to-day operations and general management of the business, they can be legally considered to be general partners.
Roles of limited partners and general partners within an LLP
The general partner may be a corporation or actual person. A Limited Liability Partnership will, in most cases, comprise of a silent partners, whereby limited partners or a limited partner provides capital for the enterprise, whilst the general partners actively run the venture. In this case, an LLP safeguards the silent partners’ interests by minimizing their liability as well as exposure.
Additionally, the LLP works like a conduit that passes profits accrued or losses suffered during business operations on to the silent partners.
In most legal jurisdictions, an agreement concerning a Limited Liability Partnership must be done in writing. Additionally, the agreement must comprise of provisions that are usually contained in typical general partnership agreements.
The legal cost of establishing a Limited Liability Partnership is usually high because in most states, LLPs are governed by complex securities laws. As a matter of fact, the cost of setting up an LLP may be significantly higher that the cost of establishing a corporation.
In a typical Limited Liability Partnership, the passive investor or limited partner may carry the burden of special tax liabilities which may offset tax-shelter advantages. Nonetheless, the tax authority usually considers each case on its own merit.
Taxation Rules in an LLP
Limited partners usually submit their income tax forms once every financial year. The tax authority requires both classes of partners (limited and general) to include their rightful share of loss or profit on their respective income tax returns. Additionally, both classes of partners are expected to pay taxes on their share of income depending on their respective tax brackets.
It is unlawful for partners to deduct losses exceeding their interest in the partnership, and that is inclusive of their investment and any finances loaned to the enterprise as well.
Why form a Limited Liability Partnership?
Professionals who make use of LLPs usually rely on good reputation. Most of them are established and run by professionals with numerous clients as well as wealth of experience. Pooling their resources together enables the partners to minimize operation costs whilst simultaneously enhancing the organization’s capacity for growth.