Partnerships are a common business structure in America. According to statistics, there were about 3.8 million partnerships in America in 2019, representing 25.3 million partners. Limited liability partnerships represented 10.8% of these.
Albeit not very well-known, limited liability partnerships are arguably some of the best partnerships in terms of profitability and asset protection. Here’s a brief overview of what you should know about LLPs and their role in asset protection.
What is a Limited Liability Partnership (LLP)?
A limited liability partnership is a form of partnership that extends a limited personal liability to all partners in the business, including general partners. To understand an LLP well, you must understand how a general partnership works.
A general partnership operates as a for-profit business entity created through a mutual understanding between two or more parties. Typically, it constitutes two or more people working together to make money.
General partnerships are rather informal, requiring only a shared interest, an optional contract, and a handshake to do business. This structure gives it its biggest downside, legal liability. Typically, if anyone sues the business, all partners are personally liable.
A limited liability partnership is a formal legal entity that limits the liability of each partner, protecting their personal assets from a suit targeting the business.
Therefore, you may lose your assets within the business, but your personal assets are protected.
How is a Limited Liability Partnership Different from a Limited Liability Company?
An LLP and LLC protect their owners’ personal assets. However, they possess a few differences.
For instance, an LLP requires a written partnership agreement with annual reporting requirements depending on the jurisdiction.
LLPs and LLCs also have different liability protections and management requirements. LLCs have more flexible management, allowing anyone to lead the business. On the other hand, LLPs require management duties to be equally divided.
An LLP may be superior to an LLC or any other corporate entity, depending on an individual’s profession. Tax-wise, it is regarded as a flow-through entity, meaning partners receive untaxed profits and must pay the taxes themselves.
The Benefits of an LLP
Here are some excellent benefits of trading through an LLP.
- Protection of personal assets from another partner’s liability or business liability.
- Better flexibility in business management than general partnerships since it’s based on the written agreement between partners.
- An LLP is deemed a legal person who can rent, buy, lease, own property, enter into contracts, employ staff, and be held legally accountable if necessary.
- Protection for your unique business name since no other business can register and legally use it.
Learn Other Ways You Can Protect Your Assets
A limited liability partnership is just one of many business entities you can use to protect your assets.
Here are a couple others:
Family Liability Partnerships
A family limited partnership (FLP) is a limited partnership that only contains members from the same family.
One of the biggest and most favored advantages of our FLPs is the tax benefits. If a family member chooses to purchase both a general partnership interest and a limited partnership interest and they transfer these limited partnership interests to other members of their family, the transferring party gets to reduce the taxable value of their estate. This ensures complete control over the management and investment decisions of both your company, and of the transferees, who are not granted authority to make decisions regarding these matters. This could enable others to take advantage of valuation discounts when the transfer is complete.
Limited Liability Limited Partnerships
A newer kind of entity called an LLP protects the general partner from personal liability for the debts incurred by the partnership. This entity has a protective barrier, comprised of the setting up of multiple layers of entities in a simpler, more refined approach.
When your business enterprise becomes a limited liability limited partnership, you can always rest assured knowing that the only assets you are risking are the assets that you invest in your business.
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A limited liability limited partnership (LLLP) is a form of limited partnership that provides further protection than a regular limited partnership.
Limited partnerships give protection to limited participants by making sure that they cannot be liable for anything beyond only the assets invested in the partnership. A limited partnership, on the other hand, must have at least one general partner with unlimited personal liability for partnership obligations.
Individuals might elect themselves as managers of a specifically built up limited liability corporation that was designated the limited partnership’s general partner to avoid the limitless personal responsibility. If the limited partnership went bankrupt, the general partner/LLC would be liable, but because it would have little assets, it could declare bankruptcy, allowing the LLC’s individual managers to continue without jeopardizing their own assets.
An LLLP provides the same result without the added cost, paperwork, taxes, or other filings with the government that come with forming a multi-layered company. It is a new type of business that protects the general partner from personal accountability for the partnership’s obligations. It provides the same level of protection as building up several levels of entities, but it is a more straightforward method.
The creation of an LLLP is permitted in little over half of the states in the United States. In Nevada, the extra protections of an LLLP above a standard LP will cost you $25 for the initial registration and $50 for the yearly report filing—a little price to pay for the greater security. That’s about the same as paying $50 a year for unlimited personal liability insurance.
When you form your company as a limited liability limited partnership, you can rest easy knowing that the only assets you’re putting at risk are the ones you put into it.