A limited liability partnership (LLP) is a choice of entity for professional service companies, such as law firms, doctors, and public accounting firms. The LLP has characteristics of a general partnership, a limited partnership (LP), and a limited liability company (LLC).
The purpose of the LLP is to provide limited liability protection for the partners. Partners are generally not liable for the debts and obligations of the LLP; however, they are still personally accountable for their own negligence or misconduct. A partner in an LLP will not, however, be liable for negligence or wrongdoing by another partner in the same LLP.
Example LLP Arrangement
John, Adam, and Emily are attorneys and want to open a Delaware law firm organized as an LLP. John and Adam each own 40% of the partnership, and Emily owns the remaining 20%.
Under Delaware law, an LLP must execute a limited liability partnership agreement, and the partnership must file a statement of qualification with the state of Delaware.
All three partners are still personally liable for their own negligence or misconduct. John cannot engage in misconduct and shield himself from liability using the LLP. Licensed professionals are held to a certain standard of care within the profession and cannot absolve themselves of liability using a legal entity. However, if John engages in misconduct, his liability will not extend to Adam or Emily.
Federal Tax Treatment
The LLP is taxable as a partnership for federal income tax purposes. The LLP should file an annual Form 1065 (US Return of Partnership Income) and provide each partner a Schedule K-1 (Form 1065). An LLP is a domestic eligible entity, so it could file an election to be taxed as a corporation or an S corporation.