What an LLP is
A limited liability partnership starts as an ordinary partnership: two or more people running a business together under a partnership agreement. It becomes an LLP by filing with the state.
- Delaware: the partnership agreement states that the partnership is formed as an LLP (or the partners approve the change), and the partnership files a statement of qualification giving its name, its registered agent, the number of partners and its election to be an LLP (6 Del. C. § 15-1001).
- Texas: the partnership files an application for registration with the Secretary of State setting out its name, its federal taxpayer identification number, its principal office, the number of partners and a brief statement of its business, signed by a majority-in-interest of the partners. The registration stays in effect until it is withdrawn or terminated (Tex. Bus. Orgs. Code § 152.802).
LLP vs LLC at a glance
| LLP | LLC | |
|---|---|---|
| What it is | A partnership registered for a liability shield | A company of its own |
| Owners | At least two partners | One member or many |
| Formed by | A partnership agreement and a statement of qualification or registration | Articles of organization (in some states a certificate of formation) |
| Run by | The partners, under the partnership agreement | Its members or the managers they choose, under the operating agreement |
| Owners' liability for the firm's debts | None for obligations incurred while it is an LLP | None |
| Federal tax | A partnership: Form 1065, profits pass through | One member: disregarded; two or more: a partnership; either may elect to be taxed as a corporation |
How the liability shield works
In a general partnership every partner is personally liable for the partnership's debts. Registering as an LLP changes that for what follows. Delaware's statute makes an obligation incurred while the partnership is an LLP "solely the obligation of the partnership," and a partner isn't personally liable for it "solely by reason of being or so acting as a partner" (§ 15-306(c)). Texas says the same in its own words, for obligations that relate to something done or contracted for while the partnership is an LLP (§ 152.801).
Two limits matter:
- It isn't a shield from your own conduct. Texas's statute doesn't touch a partner's liability imposed by law or contract independently of being a partner, such as for the partner's own negligence or a guarantee they signed (§ 152.801(d)).
- Partners can give it up. A partner may agree to be personally liable for some or all of the LLP's obligations (Delaware § 15-306(e)), and in Texas the partnership agreement can provide otherwise.
An LLC's members have the same kind of protection from the company's debts from the day it's formed, whatever the business.
Taxes
An LLP is taxed as a partnership. In the IRS's words, a partnership "must file an annual information return to report the income, deductions, gains, losses, etc., from its operations, but it does not pay income tax"; each partner reports their share on their own return and receives a Schedule K-1.
An LLC with two or more members is taxed the same way by default, while a one-member LLC is disregarded and its profit reported on the owner's return. Either kind of LLC can instead elect to be taxed as a corporation, or as an S corporation if it qualifies.
Which to choose
An LLP suits an existing partnership, often a firm of lawyers or accountants, that wants to keep its partnership structure and agreement while capping the partners' liability for the firm's obligations. Some states let only certain professions register as LLPs, so check your state's partnership act first.
An LLC suits almost everything else: one owner or many, any lawful business, and a choice of tax treatment. It's also the usual way for professionals to get the same shield where their state allows a professional LLC.
Sources
- 6 Del. C. § 15-306, Delaware Code
- 6 Del. C. § 15-1001, Delaware Code
- Texas Business Organizations Code §§ 152.801 and 152.802
- Partnerships, IRS
- Limited liability company (LLC), IRS
Common questions
What is an LLP?
A limited liability partnership: a partnership that has filed with its state to become one, so that its partners aren't personally liable for the partnership's obligations. In Delaware the partnership agreement says so and the partnership files a statement of qualification; in Texas it files an application for registration with the Secretary of State.
What's the difference between an LLP and an LLC?
An LLP is still a partnership: its partners run it under a partnership agreement and it is taxed as a partnership. An LLC is its own kind of company, formed by filing articles of organization, with members who can be one person or many and a choice of how it is taxed.
Does an LLP protect partners from each other's mistakes?
From the partnership's obligations, yes: in Delaware and Texas a partner isn't personally liable for obligations the partnership incurred while it was an LLP just for being a partner. A partner is still answerable for their own wrongdoing and for anything they agreed to guarantee.
How is an LLP taxed?
As a partnership. It files an annual information return, Form 1065, but pays no income tax itself: profits and losses pass through to the partners, who report their shares on their own returns.
Can a single person form an LLP?
No. An LLP is a partnership, which takes at least two partners. One person can form an LLC.