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Understanding LLPs

written by: •edited by: Michele McDonough•updated: 8/25/2009

A Limited Liability Partnership, though largely similar to a general partnership company, has the distinct advantage that its members have no personal liability for business debts and obligations.

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    A Limited Liability Partnership (LLP) can be described as that particular form of partnership whereby some or all of the members hold limited liability for their involvement in the partnership. The extent of liability completely depends on the jurisdiction. According to rules and regularities of this form of partnership, any partner cannot be held responsible if the other misbehaves or displays incidents of negligence. This also forms an important difference from the rules and responsibilities laid down for a limited partnership. Also, some of the partners in Limited Liability Partnerships or LLPs have some kind of limited liability (in the form of obligations or responsibilities), which is more or less similar to the shareholders of a corporation. However, the tax liabilities involved in a Limited Liability Partnership are quite different from that of a corporation.Understanding LLPs 

    Though all states provide for the formation of a Limited Liability Partnership, there are some subtle variations in the law from state to state. But the fact is that the fundamental concept of an LLP is broadly the same throughout the United States.

    There is a lot in common between a Limited Liability Partnership (LLP) and any other regular partnership - except an LLP offers reduced personal liability for business debts and obligations.

    Chapter 281 of the Acts of 1995 that came into force from the beginning of the calendar year 1996 has the enabling provision to Limited Liability Partnerships to register with the Corporations Division. The objective, as the name indicates, is to limit the personal liability of the partners of the business for debts, obligations and liabilities of the company. The law however makes it amply clear that a partner cannot escape or limit the liability for acts of negligence, deliberate errors or acts of omission.

    The LLP that is legally termed as a ‘registered limited liability partnership’ should register with the Corporation Division's Specialized Section as per 950 CMR 111 et seq. The regulations classify ‘registered limited liability partnerships’ into three different categories:

    • Registered Limited Liability Partnerships
    • Registered Professional Limited Liability Partnerships
    • Registered Foreign Limited Liability Partnerships
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    Nature of Limited Liability Partnerships (LLP)

    When one plans to set up a limited liability company, the requirement is to file articles of organization with the Secretary of State and pay the required fees. The chief features of a Limited Liability Partnership (LLP) are:

    · Recognized as a separate legal body akin to a corporation

    • An LLP has no shareholders and the participants are members. The members enjoy limited liability. The personal liability of each member is limited to the extent of capital invested in the LLP. Members are not held responsible for any personal liability. They can be personally liable only if they have signed a guarantee agreement.
    • The members need not be only individuals – they can be bodies like corporations, partnerships and trusts.
    • Non-residents are not barred from being a member of the LLP, particularly Offshore LLPs.
    • There is no specific limit to the number of members.

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    Advantages and Disadvantages of Limited Liability Partnership

    For income tax purpose, Limited Liability Partnerships (LLPs) are not considered as separate entities. The gains and losses are directly shared by the partners. In an LLP, a partner is completely responsible for his/her individual actions or negligence or is held responsible for the negligence of those individuals who were under his/her direct supervision.

    In an LLP, any individual partner has the right to make a commitment for formal business agreements even in the absence of other members. In case of any wealth being contributed to the partnership, it becomes a joint possession unless some other clause is already mentioned in the partnership agreement. Another major disadvantage of LLPs is that it is not recognized in many of the states. This form of partnership also falls short of the ease of ownership transfer as well as investment facilities provided by a corporate structure

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    Taxation Policy

    An LLP is taxed in the same manner as a partnership firm which has the benefit of flow-through taxation. But it is to be noted that to enjoy flow-through taxation status, there should be strict compliance of certain stringent rules.

    An LLP, as an entity (like LLC) , does not pay taxes but its resident members are liable to pay taxes as personal income. Non-resident members are understandably liable for taxes on income derived in USA. The redeeming feature is overseas members are not liable for tax and are not required to file tax returns as long as the income derived is not from the United States.

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