The main purpose of an LLP is to create a working environment in which skilled professionals can be held liable for malpractice, but without endangering the finances of their associates. In the event that one partner is found at fault in a malpractice suit, only that partner’s assets can be collected to satisfy the court’s ruling (assuming there was no explicit hierarchical supervisory system in place).
Pros and cons
LLP owners cannot usually have their personal assets seized to satisfy the debts of the business. However, in exchange for this protection, they are typically required to have insurance policies that cover any personal liability issues that may arise due to the often-sensitive nature of their services.
The owners of an LLP are still responsible for business decisions made by the other partners. Also, pass-through taxation means that the owner of an LLP must be aware of their self-employment tax obligations.
In order to form as an LLP, your business must have at least two owners (partners). The LLP structure was developed to allow professional service companies to have access to the limited liability formerly only provided to LLCs and corporations. Typically only medical practices, architectural and accounting firms, and legal offices may form as LLPs.
The name you choose for your LLP is an important decision, as it will be how you represent yourself to potential associates and clients. With that in mind, it is advisable that you take some time to craft a name that you will be proud to have representing you and your business.
Legally speaking, your name must be unique, and not deceptively similar, to any other trademarked name or business. It is also required that your name not be used to intentionally misrepresent the products or services you offer. For LLPs, nearly all states will also require you to add a signifier of your chosen business structure, such as “Limited Liability Partnership” or a relevant abbreviation, to the end of your company’s name.
Most states require an LLP to maintain specific insurance policies to protect against malpractice.
The incorporation process
The first step in forming an LLP is to file all necessary registration documents with the state in which you are looking to establish your business, and then pay all necessary fees.
Once the initial formation process has been completed, it is recommended (but not mandatory) that you take the time to develop a formal set of documents that will explicitly outline the ownership and management structure of the business, as well as establish your initial bank accounts.
LLPs offer professional service companies access to limited liability, much like LLCs and corporations. This prevents the personal assets of the partnership’s owners from being seized to satisfy the company’s debts. It should be noted that there are limits on this protection, and the structure is typically only available to certain types of companies.
LLP’s are typically taxed on a pass-through basis. This means that each partner is responsible for recording his or her share of the business’s profits and losses on his or her own personal tax return. There are benefits to this arrangement— the profits of the LLP are taxed only once, and not at the corporate level. On the other hand, taking advantage of pass-through taxation means that each member of the LLP is responsible for their share of self-employment taxes.
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