Business structure is one of the most important aspects of starting and running a company. The term "business structure" refers to how a business is owned and interacts with the government. Sole proprietorships, partnerships and corporations are examples of different business structures. A limited liability partnership (LLP) is a special type of business structure that offers certain advantages to both partnerships and corporations.
An LLP functions similarly to a general partnership. Ownership of the company is shared between a group of partners and the partners collectively make all the decisions about running the company. This allows the partners to pool their skills and resources, which may give LLPs an advantage over businesses run by individuals. Partnerships and LLPs may also be more attractive to employees than individually owned businesses or corporations due to the possibility of the employee becoming a partner. According to the U.S. Small Business Administration (SBA), forming a general partnership is relatively straightforward, but forming an LLP is more complex.
LLPs differ from general partnerships in terms of the debt liability of the partners. In a general partnership, each partner is fully liable for the debts and actions of the business and one another. If a partner makes an unwise decision that causes the business to go into massive debt, the other partners may have to pay the debt using their personal assets. According to the SBA, LLPs "protect individual partners from personal liability for the negligent acts of other partners or employees not under their direct control." In other words, the personal assets of partners of LLPs are not in jeopardy even if the company is in debt or goes out of business.
Similar to general partnerships, the partners of LLPs must make collective decisions, which can lead to disagreements. On the other hand, partners in LLPs may not have as much involvement in decision making as those in general partnerships. According to the SBA, partners of LLPs often have "limited input regarding management decisions, which generally encourages investors for short-term projects or for investing in capital assets."
Similar to general partnerships, the profits earned by an LLP flow directly to the partners and must be reported on their personal tax returns. Partners must pay the appropriate self-employment tax and estimated income taxes on a quarterly basis. If the business has operations in multiple states or countries, each partner may be required to send taxes to several different tax authorities.