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Forming an LLP: Pros and cons

Updated October 31, 2022
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The limited liability partnership (referred to as an “LLP”) structure is geared towards specific types of companies that offer professional services.

The basics

If your business is in a professional service industry, (think: medical practices, law firms, dentist’s offices, and architectural firms), your organizational structure options may be limited. The LLP might be for you.

LLPs offer a form of limited liability protection, which prevents the personal assets of each individual owner from being seized due to the actions of the company’s other partners.

Pros

  • Reduced number of regulations

    LLPs are able to enjoy many of the benefits provided to other, more traditional business structures, while remaining free from many of the regulations imposed on them.  

  • Eligible for pass-through taxation

    LLPs are not taxed on their business income.  Instead, the profits and losses of the business are only reflected on the personal income tax returns of each owner.  

  • Limited liability status

    The owners of an LLP cannot have their personal assets seized to pay off business debts. However, individual LLP owners can lose their limited liability status in the event of professional negligence.

  • Simple conversion process

    It is much easier to convert a professional general partnership into an LLP, than it is to reform it as an LLC or corporation.

  • Management flexibility

    LLP owners are able to have a great deal of control over how the business is managed.

Cons

  • Complex filing process

    There is a filing process that you must follow exactly in order to incorporate as an LLP. Some may find the paperwork to be daunting.

  • Self-employment taxes

    Since the taxes levied on an LLP are assessed on each partner’s personal income tax return, there is a need for each partner to understand self-employment taxes. If your business is turning a profit, it’s likely that you will need to pay both the employer and employee shares of employment taxes.

  • Name requirements

    If you choose to incorporate as an LLP, you may be required to note your structural choice in your business’s name.

  • Shared nature of partnerships

    An LLP is structured to protect owners from liabilities stemming from malpractice. This doesn’t mean that the general principles of partnerships don’t apply. The business dealings of each partner are still connected. You may be liable for business debts run up by other partners.

Swyft can help!

Hopefully this quick list of pros and cons will give you a bit more insight into the LLP structure. If you’re interested in pursuing an LLP filing for your company, contact one of our experienced business agents today. We can take the hassle out of it so that you can focus your efforts on running your business!

Originally published on October 31, 2022, and last edited on October 31, 2022.

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