Okay, so you want to start a LLP liability limited partnership for the benefits. It is the type of partnership designed for people who want to have equal say in what goes on in the company but not equal liability. This type of partnership became very popular after the collapse of the real estate industry and fall of the oil industry in Texas in the 1980s. The LLP protects members from their personal liability except for their investment in the LLP. The LLP protects its members from each other’s negligence or misconduct. It works great for professional service organizations like accounting firms, architecture, and law firms. So If you starting a limited liability partnership, what are the best states to set up your LLP and which states are not so great for starting an LLP?
If only it was that simple. It’s not. LLP’s are governed by state law. So, if you are operating in only one state or primarily in one state, it is usually best to form the LLP in that particular state. Each state has different rules for the LLP. If you form the business in a different state, there are good chances that you will have to fill out more paperwork in your state and have to pay additional costs. If your business has complexities like trade names, intangible products, minority partners, or partners who are located in various states, etc… it is best to consult a lawyer.
In the states of California, New York, Oregon, and Nevada you can only form an LLP if you are part of a professional organization such as that of accountants, architects, or lawyers.
As said above, it is best to form your LLP in the state that your organization exists. But, there are the exceptions to the rule. If you form the LLP in certain states, many jurisdictions only offer what is called “limited shield." What this means is that your limited liability protection is significantly reduced. These jurisdictions include:
Alaska, Arkansas, District of Columbia, Hawaii, Illinois, Kansas, Kentucky, Louisiana, Maine, Michigan, Nevada, New Hampshire, New Jersey, North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, Texas, Utah, and West Virginia.
Most other states offer the full protection that you find in an LLC or corporation. Remember that the LLP is still very new and states are constantly changing the rules and shield protection of the LLP. Florida just changed their “limited shield" liability to a “full shield" liability in 1999.
So, the advantages are that the LLP does not have the corporate procedures like annual meetings and minutes. The profits pass to the partners who pay for them in their income tax.
The disadvantages are that any partner without the other may bind the LLP while money and property contributed to the LLP are owned by the partnership. The largest disadvantage is that the rules in different states are different, so you see that it is extremely important to check with a lawyer to see what the ramifications are in your state, especially if your state was mentioned as a “limited shield" state.
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