Limited Liability Partnership Agreement Template + Pros & Cons

Cody Cromwell
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Limited Liability Partnership Template Agreement

Not everyone knows what a limited liability partnership is, or worse, what one looks like. If you’ve been part of a team before, it’s probably not surprising to hear that they sometimes create an agreement of limited liability partnerships (LLPs) that limits each member’s liability for the decisions or actions they take on behalf of the LLP.

This agreement protects the members of a group from participating in an LLC and all the risks and liabilities that come along with it. Yes, it is tax-friendly. This means the buy-in price is lower because of both lower liability exposure and the reduced amount of personal assets needed to start the business.

LLP Advantages and Disadvantages

4 Advantages of an LLP

In a traditional partnership, the owners run the business and agree on everything – from what to drink for lunch, to how to split revenues from bookings, to the level of investment the business needs.

This may seem like a simple arrangement but it means that when it comes to dividing the business’s profits, the two owners have to work out how to split them between themselves. And when it comes to dividing the business’s losses in the event of a breakup or dissolution, they have to reach an agreement on how to pay back the money the business owes.

From a practical perspective, this can be very difficult and stressful. That’s why if you and another owner of the business don’t work out a way to divide the profits or allocate the business’s losses, you both have to rely on a third party lawyer and the courts.

This can lead to mishaps and bad blood.

In an LLP, however, you get around this potential messy situation by structuring the business as a limited liability partnership. By structuring the business as a limited liability partnership (LLP), you and your business partner can each own their own shares in the company.

Limit Personal Liability

You would not ordinarily be allowed to contract out of your personal liabilities if you were to enter into a partnership agreement for a venture.

However, if a limited liability partnership agreement (LLP) provides or defines the limits of the personal liability of the partners, then you can virtually stipulate that no partner would be personally liable for any debts of the partnership.

These partners would be protected as long as the LLP agreement allows them to contract out of their personal liabilities upon entering into the agreement.

A personal liability can also be contracted out of in the LLP agreement or by any prior agreement, provided that the parties present sufficient consideration to effectuate the agreement.

This consideration might take the form of a higher fee for services rendered, a greater stake in the business, or any other thing of value.

All contracts, other than the LLP agreement, are subject to the jurisdiction of the court in which they are entered into.

Just because a partnership agreement limits a partner’s personal liabilities, does not mean that the partner is released from his liabilities under the terms and conditions of the LLP agreement itself. The LLP agreement will thereafter be subject to the provisions of the Partnership Act (Cap. 530, Laws of New Zealand) and to the controlling judicial decisions and statutory provisions.

Easy to Create and Administer

Limited Liability Partnership (LLP), also referred to as a Limited Liability Partnership Agreement or LLP Agreement, is a contract that's kept between two or more parties for setting up and running an LLC. While the formation of an LLC is the responsibility of the business owners, the LLP Agreement is created by the state and kept by the LLC. In most states, the limited liability company laws (LLC laws) mandate that the LLP Agreement be prepared and filed by the attorney – for free!

> The most common business structures with limited liability accounts for about 94% of all businesses in the USA. These business structures include but are not limited to LLCs, S-corporations, and C-corporations.

>The LLC is one of the most favored types of business form for Americans, as both assets and liabilities of the business are divided into member interests.

> Unlimited liability is not available to the LLC members and controllers, and thus it is perfectly suited for the risk averse business owner or professional.

> LLP agreements are similar to the Articles of Organization of the LLC in Pennsylvania, and thus they're easier to draft, administer, and maintain.

> By default, the LLP Agreement is kept by the business owners in the state in which it was drafted. However, American Express permits the keeping of these agreements in any state provided that they have proper attestations.

No Business Income Tax

Limited liability partnerships, or LLCs, represent an exciting opportunity for those who are looking for a new type of business entity. Because LLCs are a form of business structure, an LLC is a unique organization designed to fulfill the specific needs of the business.

Also, LLCs are not subject to any business taxes. With this space-saving structure, the income for an LLC will not be taxed. However, they should consider making an election to be taxed as an S-Corporation, and that will depend on the personal residence of each member.

The Internal Revenue Service presumes that a limited liability partnership is a partnership for all tax purposes. S-Corporation status allows the S-Corporation to be taxed as a sole proprietorship, disregarding the earnings of the other members of the LLC.

From a tax perspective, Limited Liability Partnerships have the following characteristics:

Limited Liability Partnerships’ dollar amount for tax purposes is based on the value of their assets, not their profits.

All profits and losses will be divided among the partners, and each partner will use their personal tax rate, not the corporate tax rate.

The partnership will not be treated as a corporation or a sole proprietorship.

Can Raise Money From Outside Sources

Like:

4 Disadvantages of an LLP

Limited liability partnerships, LLC’s, and LLPs are all similar but different entities. Here are some of the major differences between them.

Each comes with its own set of disadvantages. So, if you have decided to go this route, then you will be well aware of both the pluses and minuses of it.

Limited Applications

Highly flexible documents. Can use substitute terms. Adjustable terms.

Quick and inexpensive to prepare.

Allows attorneys to avoid in-depth discussion of every dollar that comes in and every dollar that goes out.

Allows attorneys to focus on other matters such as contract construction and the law.

Allows them to concentrate on the law and not on the mechanics of managing the business.

Continuing Status of LLC without Amendment

Everyone is treated as a general partner and generally has the same obligations as the LLC and liability as the LLC.

Partners not liable for the acts of the LLC.

Partners’ liability is limited to the extent of their investment (limited partnership).

Flexible financing.

Easy to structure to suit a specific need.

Liability can be extremely limited by using insurance to cover sole proprietors.

Private funds are separate and distinct from a corporation’s private funds.

Can use in a successful professional situation at any size.

Limited to the financial goals of the business.

Partners may act in their own interest.

Business with no outside investors.

Can be used if a sole proprietor wants to incorporate.

More Difficult to Form Than an LLC

This type of business entity is used in conjunction with a limited partnership because of the added liability protection provided.

This is a fairly complicated entity to form because it requires that it be signed and supported by a lot of people. Brevity of the name is a plus here, as this template can be quite lengthy.

Pros of Forming This Entity:

It does not require a large up-front filing fee.

It is an inexpensive way to get liability protections.

Cons of Forming This Entity:

You will need to prepare the draft yourself.

You will need to work with a lawyer to get all of the details in order.

This type of business entity is used in conjunction with a limited partnership because of the added liability protection provided.

Not to mix business entities, a limited liability partnership is a business that combines the limited partnership and a business partnership. You will have individual partnership assets and liabilities while still enjoying some limited partnership protections.

Each partner's liability will be limited to the partners' pro-rata share of the assets and liabilities. This type of partnership is a way to get some of the limited partnership protections while still operating your business as a partnership.

Pros of Forming This Entity:

You will have some limited partnership protections.

You will have individual partnership assets and liabilities.

Cons of Forming This Entity:

Less Flexible Tax Structure

As a general rule, unlimited liability companies have fewer and less complex financial reporting requirements, and for good reason. LP types operate very much like a sole proprietorship. For this reason, LPs are often favored by small businesses in states that have no separate LLC or corporation entity, at least until the business reaches a certain property and asset threshold.

Unlike an LLC, which may elect to file an annual tax return with the IRS, an LP isn’t required to file one, and thus may hold assets in trust. To complicate matters further, unlike corporations, partners in an LP are personally liable for the underlying debts and obligations of the business.

In a limited partnership, all partners are limited to their capital contribution of funds to the partnership and any profits thereof. Generally, this is a stipulation found in most limited partnership agreements. The partners receive an equal share of any profit the business generates.

The advantages of an LP are that the structure of an LP allows a partnership to raise funds easier from investors, third party lenders, and banks. LP’s have flexible and simplified tax reporting requirements and IRS submissions. This allows the business to be more efficient and removes much of the financial burden from an LLC’s personal tax filing requirements.

Under an LLC structure, the owner may have to pay estimated taxes and file an annual tax return; this is not the case for an LP.

Extra Licensing Fees

Alternatives to an LLP

LLC vs. LLP

S-Corp vs. LLP

C-Corp vs. LLP

A Limited Liability Partnership, or LLP, is an unincorporated business entity that functions as a partnership. In many ways, it acts as a limited liability entity as defined by every State in the United States.

According to the U.S. Small Business Administration, Limited Liability Partnerships are the most sophisticated form of partnership and deal with technical issues involved in running any business, including:

  • Bank Accounts;
  • Incorporation;
  • No Tax Identification; and

Expanding Businesses.

LLLP vs. LLP

Sole Proprietorship vs. LLP

Who an LLP is Right For

If you have business interests that overlap with another LLC partner, the LLP may be right for you. LLCs are designed to protect the interests of one owner/shareholder. When you have two or more owners/shareholders, like business partners, LLP is the right choice. The LLC provides business protection to each owner without sharing the ownership.

A trade arrangement that is time-limited ensures that each owner/shareholder remains the sole owner and should the arrangement end, each owner returns to his position as sole owner. As an option for forming an LLP, you can also elect Mono-LLC or Multi-LLC.

An LLP is usually used as an alternative business structure for conducting business if a person requires the protection offered by a corporation, but does not want the liability protection offered by a sole proprietorship. Sole proprietors are fully liable for any business debts and liabilities.

Unless an individual qualifies for a specific entity, this is the only business form that may be used for an LLC that has only one member.

In comparison to an LLC, the LLP offers the limited personal liability protection afforded to a corporation.

An LLP is an available, business structure that can be elected by a single person or two or more members. The first advantage is that your LLC can audit its own books of accounts, and this will help you to ensure accuracy and proper record keeping.

LLP Frequently Asked Questions (FAQs)

As an entrepreneur thinking about forming an LLC, you’ll both have and receive a number of questions. Before we delve into your most pressing questions, here are a few frequently asked questions that you may want to be prepared for.

Who Needs a Limited Liability Partnership?

What are the benefits of forming an LLC?

What are the disadvantages of forming an LLC?

Why should I form an LLC so early in my business?

Can I form an LLC in my state despite being a Non-Resident?

Does the LLC have to be formed in my state?

What are the costs of forming an LLC?

What if I form an LLC but don’t decide to incorporate until later?

What happens to my business if I don’t incorporate?

Is it too late to change my mind and incorporate?

How do I keep my LLC taxes low?

What are the LLC operating costs?

What are some of the issues you may encounter while forming an LLC?

Is forming an LLC formal or informal?

Will my LLC file a separate tax return?

When I form an LLC, what will happen to my taxes?

What if my LLC gets sued?

Do I need a lawyer to form an LLC?

Can I form an LLC myself?

What’s the Difference Between an LLP and LLC?

The default business entity that’s found in most states is the Limited Liability Company (LLC). An LLC is a limited liability company that offers more liability protection than a regular corporation. But if wanted more liability protection than an LLC could offer, the Limited Liability Partnership (LLP) could be a better option.

Limited Liability Partnership (LLP) vs. Limited Liability Company (LLC): What’s the Difference?

Limited Liability Companies (LLCs) and Limited Liability Partnerships (LLPs) are both corporations that offer limited liability to their owners, but an LLC offers more liability coverage than an LLP. LLCs are often used interchangeably with the term –limited liability companies,” while LLP’s are often used interchangeably with –limited liability partnerships.”

LLPs are designed for businesses that want to charge an annual fee for the services of the LLC, and may wish to have more control over their rights and liabilities than an LLC allows. An LLC tends to be more of a self-managed business than an LLP, which offers more liability protection than an LLC can.

What is an LLLP?

(Limited Liability Partnership)

LLLP is an owner-managed partnership that limits your personal liability to zero for the debts and acts of partnership. This means that you and anything owned, assets or otherwise, are 100% separate from any entity or entity owned by you.

There are some risks and benefits of running an LLLP. But running an LLLP is not for everyone. In many ways, it’s like owning a company where the management team makes all of the decisions and the owner has no controlling interest.

On the one hand, that indicates that you are 100% responsible for all of what happens and if the LLLP does not work well for you, the owner has no recourse to owe anybody anything.

On the other hand, it’s also possible to draw your own salary from the LLLP as you make decisions for the LLLP. This often means that keeping the LLLP in good standing is more out of interest for you than out of obligation to anybody else.

One of the biggest drawbacks of the LLLP is its tax structure. In other countries, a partnership is taxed within that country and then tax returns are filed on a yearly basis as usual.

In the US, partnerships are often considered partnerships because they are not really corporations at all. The result is that they are considered privately held entities and do not have an annual report.

What’s the Purpose of an LLP?

Limited liability partnerships (or LLCs) are a great option for business owners who want the features of an LLC but who do not want the onerous cost and complexity of forming a corporation. Because these entities are limited liability entities, they are not afforded the same level of flexibility as corporations, but they offer the benefits of incorporating, including limited liability. One of the main differences between an LLC and a limited liability partnership is that the LLC option is generally more flexible financially, while an LLC can have multiple owners, a limited liability partnership can have only one owner. A limited liability partnership also needs to be registered with the state in which it will do business, which must be done through a certain form and procedure.

An LLP is a distinctive type of partnership and is often formed when two or more individuals or businesses pool their resources and skills and form a company that benefits from both their individual assets and experience to operate and grow the company. The LLP becomes a single business unit with the limited liability of each individual member being protected and losses are divided proportionally among the partners.

An LLP has unique tax advantages that are not available to a corporation, which is what makes it a preferred choice for small businesses seeking to grow. In fact, an LLP is often chosen by small businesses that employ less than 15 individuals and want to preserve the flexibility of a business partnership while reducing administrative costs.[1]

How is an LLP Taxed?

The Limited Liability Partnership (LLP) is regarded as a tax-effective company structure. It is, however, a complex structure and is quite difficult to set up and operate successfully.

The main advantage of the LLP is that it has limited liability, which means that the partners are personally liable for the partnership’s debts only if they have contributed funds to the partnership.

The LLP structure also offers flexibility in the way its affairs are run. With a sole shareholder or a single general partner, the risk of personal liability will be considerably diminished. With a limited liability partnership, the risk of personal bankruptcy is greatly reduced.

It has been suggested that an LLP is usually the preferred option for small businesses because of its tax and liability benefits. There are, however, disadvantages to an LLP, all of which are tax-related.

Before you sign up to form an LLP or expand your business with the LLP structure, you need to consider whether the advantages of the LLP outweigh its disadvantages.

The main disadvantages of an LLP are the tax implications. So if you plan on operating your business using the LLP structure, you need to be aware of the tax implications resulting from its use.

Since the LLP has characteristics of a company, it is treated as such for taxation purposes. The LLP is treated as a company for financial accounting purposes. You can expect to pay annual subscriptions for the LLP, similar to those for a company.

What Should Be Included in a Partnership Agreement?

A general partnership agreement generally becomes fully effective when initial capital contributions are made. Upon successful formation, the partnership agreement is in effect until any modification occurs. The partnership agreement’s terms, which are the basis of the partnership as legally defined by the state, are set forth in the partnership agreement. Each partner is jointly and severally liable for the obligations of the business.

Different states have differing degrees of control over general partnerships. States in the northeastern part of the country have the most complete restrictions on general partnerships. These states will restrict a general partner’s ability to make decisions concerning the partnership’s operations. However, general partnerships are common business structures in those states, because of the degree of flexibility they offer for a business. These states will still enforce the obligations and liabilities that partners become subject to during the formation of the partnership.

Not all states have the same degree of control over general partnerships. Pennsylvania, for instance, is among the less restrictive states with respect to general partnerships. A partnership agreement is where the partnership and interested parties come to an agreement, creating the collective partnership agreement. This is a public document that should be distributed among the partnership’s partners, who should promptly become familiar with the document before being subjected to its obligation and restrictions.

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