What Is a Limited Liability Partnership Agreement?

Before defining the agreement document, we need to know first what a limited liability partnership is. Putting it simply, a limited liability partnership is a type of business entity or structure in which every partner in the business is protected from the personal liability that can be incurred from the debts and obligations of the business. Why is it a limited liability? It is because the partners also don’t have any form of control over business operations. Hence, they pay fewer taxes.

A limited liability partnership agreement is a legal document that constitutes an agreement that is formed between two or more individuals or businesses who want to manage and operate a business together. This document describes the mutual rights and responsibilities of the parties involved. Furthermore, the LLP agreement also addresses profit sharing, new member admission, management and decision making, retirement and exclusion from the LLP, and outgoing members’ entitlements and obligations.

Elements of a Limited Liability Partnership Agreement

Here are the following elements that are discussed when forming a limited liability partnership agreement:

What are the Benefits of Entering a Limited Liability Partnership?

Why would you set up your business as this entity? Well, here are the following reasons why entering a limited liability partnership can be beneficial to your business:

Protection from personal liability. The main purpose of a limited liability partnership is to defend each partner from the mistakes that the other parties can possibly commit. There is no solitary, general owner of the company; instead, each partner owns a portion of it and divides responsibilities accordingly. If another partner is charged for malpractice, for example, your assets are not at risk. However, the protection only applies to personal assets, not partnership assets. As a result, if a lawsuit is filed, the assets of the partnership are targeted rather than those of individual partners.Tax Breaks. A tax break refers to a reduction of the total tax liability of the taxpayer and is considered a result of the tax laws. In a limited liability partnership, the partners tend to get a better tax situation because their cash is only taxed once when they file their income taxes. Earned income and profits pass along to each partner’s personal tax return. This process is known as a pass-through entity.It enables more flexibility. What does having more flexibility mean? A limited liability partnership is simple to set up and reorganize. Partners come and then go, the business grows and shrinks, and even the method by which a partner’s income is determined varies. With the help of more flexibility, the business partner’s compensation can be determined by the following options: receiving a proportion of the company’s earnings, gross income, or from across the board itself. Having the ability to change your company’s structure on a regular basis without changing its business entity type will prove to be quite beneficial.Streamlined management structure. A limited liability partnership is simple to set up, but it is adaptable in more ways than one. As previously said, partners can enter and leave, taking their clients and workers with them. A limited liability partnership’s management structure is simply more simplified than that of, say, a corporate entity. A limited liability partnership does not need to defer to a board of directors or stockholders; instead, it just needs to hold votes among its partners.

Risks or Drawbacks of Entering a Limited Liability Partnership

When deciding to enter a limited liability partnership for your first business, it is important to remember that there are also risks or drawbacks that you need to be aware of. Here are some of those:

Special considerations for taxes. Because of the unique structure of limited liability partnerships and the exceedingly complicated tax reporting requirements, several taxation authorities see the arrangement as a non-partnership for tax reasons. This may be an issue for partnerships that necessitate special tax attention. Because of all the tax complications that a limited liability partnership can present, several places even outright prohibit LLPs.Selective eligibility. The main disadvantage of forming a limited liability partnership is that not everyone can do so. And it is, in fact, a significant one. The laws governing who can create limited liability partnerships are, as it turns out, rather strict. If your company does not fit into one of the few qualified categories, such as law companies, accounting firms, or architects, a limited liability partnership is probably not the best option for you. These types of businesses are best suited for forming a limited liability partnership.It is not recognized everywhere. Limited liability partnerships, unlike general partnerships, are not recognized as authorized business entities everywhere. Some even restrict the formation of a limited liability partnership to select practitioners such as physicians or attorneys. Other jurisdictions may permit the creation of an LLP, but on the condition that they will place strict tax constraints on the business, both when it is founded and on an ongoing basis. Furthermore, regardless of where they operate, many individuals only see LLPs as less credible as legitimate companies compared to. let’s say, corporations.It can be inefficient. Because there isn’t always a single leader who takes the key choices, limited liability partnerships may be less efficient than other corporate structure kinds. All partners are legally permitted to engage in a managerial capacity, which may result in redundancy, competing directives, and squandered resources. The simple solution to this is by communicating clearly and regularly. Inefficiency, no matter what sort of business it is, will always have a significant influence, and if it is detected properly, it will be simple to cope with.Unintentional binding. Individual partners in a limited liability partnership are not required to consult with other partners in some commercial agreements. To maintain the company’s overall integrity, a partnership agreement should be drafted that specifies what each limited partner may and cannot do when making business choices. The financial accounts of LLPs must also be made public, which may cause problems for some partners.

How to Form a Limited Liability Partnership

Now that the basics of a Limited Liability Partnership have been discussed, along with its advantages and disadvantages, it’s time to discuss the steps on how to form one:

  • 1. Verify if You’re Eligible or Not

    Before going to the know-hows of forming this partnership, it is important to see if you’re eligible or not. Different places have different laws concerning the formation of an LLP. If your profession is an architect, a lawyer, or a doctor, then there is a great chance that you may be eligible to form a limited liability partnership with others. Some places have really tight restrictions regarding the formation of LLPs, so it’s best to actually know if you’re qualified to form one or not before applying, as it can be a time-waster if you’ve applied only to find out that you’re not eligible.

  • 2. Give Your LLP a Name

    Once you find out that you’re eligible in forming a limited liability partnership, then it is time to pick a legal name for your LLP. Your company’s name should be unique from the identities of other businesses in your vicinity. You’ll also need to add the phrase”Limited Liability Partnership” or the acronym”LLP” to the end of your name to signify that you’re operating as a limited liability partnership.

  • 3. Designate an Agent and Apply for the Necessary Papers

    Once you’ve given your LLP a name, then it is important to now pick a registered agent. This is important because a registered agent is someone or a corporation who agrees to accept legal documentation and other paperwork on your firm’s behalf. It should also be noted that you should pick this individual carefully since they are responsible for informing you of any pending lawsuits concerning your company.

    After that, depending on your sort of business and the state in which you operate, apply for the essential business licenses and permissions and make sure you’re up to date on that paperwork.

  • 4. File an LLP Certificate

    After applying for all the necessary papers, the next step is to file a certificate. All LLPs that are formed are required to file a certificate of limited liability partnership. Having a certificate is very important since it legalizes the operation of your LLP. When you apply for one, you are often required to submit your company’s name, address, the names and contact information for the partners, the contact information for the registered agent, and other administrative information.

  • 5. Get Your Business Known

    Once you’ve done all the necessary legal steps, then the limited liability partnership is now ready to operate. The only remaining thing is for it to be known or to get the LLP recognized in your vicinity. One way you could do this (and it may even be required in some areas) is by publishing a statement in the classified advertisement section of your local papers or getting it announced in your local radio stations.


What is the difference between a limited liability partnership and a limited liability company?

The most significant distinction between an LLP and a limited liability corporation (LLC) is that the LLP relies on partners for effective ownership. While partners in an LLP are not normally accountable for the debts or irresponsible acts of other associates, the liability protection for shareholders of an LLC extends to the debts incurred by the business as a whole or any legal actions brought against it in court.

Should there be a witness when signing the limited liability partnership agreement?

Yes, there should be a witness. When the LLP Agreement is finished, all of the partners should sign and write the date on it. Each partner’s signature shall be witnessed by an independent adult, defined as someone over the age of 18 who is not affiliated with the LLP. This practically implies that the LLP’s partners cannot testify against one another. After signing the agreement, copies of the agreement should be kept by each of the partners who are involved in it. Should they wish to amend any of the terms, they can do so but it is important that they should be sure to do so in writing.

What does “limited” mean in a limited liability?

The specifics of an LLP vary depending on where you form it. However, the personal assets as a partner are often safeguarded from legal action. Essentially speaking, liability is restricted in the sense that you can lose assets within the partnership but not assets outside of it (your personal assets). Any lawsuit will initially go after the partnership, yet a particular partner may be held accountable if they individually did anything illegal.

Ultimately, the type of business entity that you decide to stick with will set a precedent on how the general public will see your business. Entering a limited liability partnership enables its constituents to combine the flexibility of their business with multiple owners and it is also advantageous because it comes with the legal protection for each of their personal assets. The limited liability partnership agreement is also a valuable tool since it provides a clear definition of the partner’s assets and liability limitations. In this article, you can acquire different examples of such agreements so that you have a reference when you need to draft one.