What is Limited Liability Partnerships - Advantages and Types

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Organizations see it as an opportunity to connect with other businesses with the intent to establish good relations and sturdy partnerships.

We can define a business partnership as a legal agreement between two or more parties that establishes a bond determining shared ownership of corporations. A partnership can exist between people or whole businesses, confirmed through a written document. Partnerships are formed to increase resources and expertise and divide the workload. Limited liability partnerships are one such partnership. There are many advantages of limited liability partnerships, which are discussed below.
What is a Limited Liability Partnership?
Limited liability partnerships are a form of corporate business that provides the benefits of limited liability of a company and the flexibility of a partnership simultaneously. This system allows partners to have proportional savings while increasing the production level. The workload is spread to multiple partners, who bring along their expertise, and help divide labor. Such a system can benefit the business by increasing production, thus generating greater profits. Limited liability, however, means that the partner’s liability is limited to the investment they put into the business. All the partners get equal shares, which means they also divide the overall profit accordingly. Limited liability partnerships are common in the corporate world. Lawyers, accounting firms, and medical centers are some businesses that function on limited liability partnerships.
Prerequisites of starting a Limited Liability Partnership
The first and foremost prerequisite of a limited partnership is that two or more members should exist for formation. There is no upper limit to the number of partners permitted. A limited liability partnership does not have directors, shareholders, or members. Instead, it has partners that are in charge of the entire business. As we classify limited liabilitypartnerships as a coalition and not a corporation, Corporation Tax does not usually apply to them. However, each partner is responsible for paying all their taxes, especially the Income Tax.
Some formal procedures are to be carried out before setting up the business. A few companies usually add LLP in front of the company's name to indicate that it is a limited liability partnership. Most countries globally require all partners to be residents of the country where one intends to establish the business. The owner should duly fill in all other documentation regarding the established business. These documents vary from country to country, so thoroughly review all local rules before launching the business. In some countries, stating that a limited liability partnership is being established to make a profit is essential. The rationale is they do not allow such corporations to function as non-profit organizations as a security measure.
Types of Limited Liability Partnerships
Limited Partnerships
Limited Partnerships in which one of the partners is a general partner and the others are limited partners. The general partner manages the everyday tasks of the company. The limited partner, on the other hand, cannot take part in the managerial decisions that are to be made by the company. They act as a silent partner that has invested in the company. General partners, in this scenario, have unlimited liability protection against debts, while limited partners have personal asset protection against debts and obligations. It means the general partner may lose their home due to losses, while the limited partners would not. However, if a limited partner tries to be involved in the company, they will also have to face the consequences. Limited partnerships do not pay their taxes as a corporation, but each partner is responsible for their own taxes.
Professional Limited Liability Partnership
Professional limited liability partnerships function exactly like a limited liability partnership, except only professionals can be partners in such business. It is necessary for some regions globally that don't allow professionals to make their own limited liability partnerships. Hence, instead, they form their own professional limited liability partnership. In this case, all the company members should have specialization in a certain skill set. It is a requirement for professional limited liability companies to add a PLLC in the name of their business. The main difference between both types of limited liability partnerships is the way they are taxed. PLLCs are taxed the same way a corporation is, and the partners divide the tax according to the corporation tax. It is not the case in a limited liability partnership, where the partners have to pay their own taxes.
Limited Liability Limited Partnerships
Limited partnerships and limited liability limited partnerships merge to form a limited liability limited partnerships legal structure. Limited liability limited partnerships consist of both general and limited partners. These partnerships provide all its partners with little liability protection regardless of their status. Every general partner is liable for their own doing, so whoever messes up will have to pay for their own mistakes. A disadvantage of such a system is that general partners have greater authority than limited partners. They can control the company and make decisions. On the other hand, limited partners act as silent investors only and are assigned no role in the company's administration. One major drawback of this system is that limited liability limited partnerships function in only certain areas around the world, as most countries do not allow such a business structure to exist.
Advantages of Limited Liability Partnerships

- The greatest advantage of having a limited liability partnership is the protection of a partner’s assets. In the case of debt, only the assets of the member responsible for the loss will be affected. Other members will remain unharmed.
- Starting a limited liability partnership is very convenient. It calls for customized agreements at the start of a business to cater to the partner's needs. There are lesser complications in legal issues and resolutions.
- No minimum capital is specifically required to start a limited liability partnership. Other business structures require a minimal investment to function. For good measure, the registration cost is also the lowest compared to other companies.
- The partnership is not required to pay any taxes on income or shares. Each individual is responsible for their own taxes, as no corporation tax exists for limited liability partnerships. Therefore, all employees pay their taxes, not as a corporation.
- Due to individual taxation, it is easy to avoid white-collar crimes like money laundering and corruption. Each partner is responsible for every mishap that occurred because of them. This way no one has to suffer for crimes they did not commit. This just taxing system is another way of ensuring all business is transparent. In other non-liable business structures, it is easy for any partner to tweak taxes to their benefit, for which the whole company has to suffer.
- Another advantage of limited liability partnerships is that fair trial is for everyone. If a partner has invested more effort in the business, they get the reward. No partner would get any more than they are allocated, and one can't distort the business accounts for personal benefits. An example of this can be seen in the following scenario. If the client of one of the partners sues the law firm with two limited partners, then the consequences will only apply to that partner. The other innocent partner will be safe from the repercussions of the actions of the guilty partner. In the case of any other form of partnership, like a limited partnership or a general partnership, both partners would suffer from the consequences.
- If any of the partners wants to withdraw from the partnership, they can walk away with their investment. However, if the agreement made at the time of the initialization of the partnership does not persist, then they would have to comply with the said agreement. It is also easier for partners to join the partnership, usually after the approval of all the other partners.
- In a limited liability partnership, partners are not given complete control over the administration and have to act as silent investors, with no say in the running of a business. However, there is an alternative to establishing control and having a say in business matters. Partners can hire professionals as junior partners who can manage the company. These junior partners are salaried and have no stake or liability in the partnership. They work under the instructions of the partner who hired them, essentially transferring power to the silent investor. They employ these junior partners by giving them the hope of promotion to full-time partners if they work well. It motivates them to work harder to impress their partners, who use them to run the business according to their liking.

Limitations of a Limited Liability Partnership
While limited liability partnerships seem like a beneficial business structure for partners to invest their assets in, it also has some limitations. Below are the disadvantages of a limited liability partnership.

The main disadvantage of a limited liability partnership is the lack of privacy. It calls for public disclosure of financial records for governing bodies to maintain records and manage taxes. These accounts may declare the income of the partners to the public. Most members would not feel comfortable sharing personal information with the public.
The company cannot store the profit for the future. All profits have to be divided equally amongst the partners and other members of the organization. The company also cannot withhold profits for future tax years. Plus, if the business suffers a loss the following year, everyone involved will suffer. It means that partners do not have a steady source of income, which would fluctuate according to the profits made by the business.
A limited liability partnership should have a minimum of two members. If, in any case, one of them chooses to withdraw, the partnership will have to be dissolved immediately.

Differences between Limited Liability Partnerships and other forms of partnerships

General Partnerships
A general partnership is a partnership that operates as a whole unit, unlike limited liabilitypartnerships, which function as a separate entity distinct from their partners. Therefore, in a general partnership, one individual can be responsible for the fate of the entire business. A partner can be sued, and their assets can be pursued to satisfy the debts of a general partnership. This way the partner is liable for any decisions made by other partners and their actions. So, all the partners need to pay the tax rather than the individual. However, businesses choose such a partnership structure because it does not require extensive paperwork to establish the business. Moreover, general partners get to have a say and make decisions in the company, giving them complete power.
Limited Liability Companies
Unlike its namesake, limited liability companies are legal entities on their own. Whereas in limited liability partnerships, the business has no legal identity outside the business owners. Limited liability companies do not necessarily need multiple owners, who can also be foreigners. The company gets protection against legal actions and business debts. Due to this protection, any losses that occur in the business need to be paid for by the owner. A partnership ends if one of the owners dies or sells their ownership. Yet, businesses can be inherited or sold without the need to dissolve.
FAQs

What is the purpose of a limited liability partnership?

The purpose of a limited liability partnershipis to form a business of two or more members. Every member gets liability, which means they are responsible for their actions. The rationale is to attract more investment and bring in more expertise.

Why is an LLP better than a company?

Limited liability partnerships are more flexible than limited liability companies. Any profit made can be freely shared between partners. Whereas, in other business structures, due to issues related to employment, the distribution of profits is constricted.

What are the advantages of limited liability?

A limited liability partnership is a very transparent business structure, as every partner is responsible for their own actions. The profit is split justly between partners according to their efforts and investments. This fair distribution system prevents the commission of white-collar crimes. A minimum of two members are required to set up limited liability protection.,

What does an LLP protect you from?

A limited liability partnershipoffers partners protection of their assets. In case of a loss, the partner's assets responsible will be seized, while the others will remain unaffected.

What are the features of a limited liability partnership?

A limited liability partnershipis a business structure that offers liability to partners and allows the business to run like a company.Partners involved in a limited liability are responsible for themselves. Each partner should pay income tax according to their investments, and no corporation tax will be charged for the business.
Conclusion
For an individual investor, limited liability partnerships are one of the most efficient business structures. It offers protection of assets and is a fair way to divide profits. Each individual benefits according to the investment and efforts they put into the company. Although in a regular limited liability partnership, the partner acts as a silent investor, there are ways to get a say in the operation of the business. This type of partnership has its cons, which include the public declaration of assets, lack of privacy of personal information, and no steady income. However, if the investors do not mind these limitations, they should form a limited liability partnership.