How to Form a Limited Liability Partnership

How an LLC Differs From Other Partnership Types

Limited Liability Partnership
Limited Liability Partnership. Ben Pipe Photography/Getty Images

Partnerships in General Explained

Partnerships come in several different types. All partnership types have several common characteristics: 

1. All partnerships consist of individuals who have agreed (with a partnership agreement) to run a business together. Each partner has invested in the business.  

2. The partnership is a separate entity, but in most cases, the partners have liability for the actions of the partnership.

This arrangement differs from a corporation, which is separate from the owners. 

3. The partners are not employees. The partners take money from the business as distributive shares, not salaries. 

4. All types of partnerships pay income taxes by filing an information tax return on IRS Form 1065, with individual partner shares of the income or loss of the partnership reported on a Schedule K-1. 

How is a Limited Liability Partnership Different from Other Partnerships? 

A limited liability partnership (LLP) is different from a general partnership or a limited partnership.

An LLP differs from general partnership because all partners in an LLP are shielded from wrongful acts or negligence of other partners.

An LLP combines characteristics of partnerships and corporations. As in a corporation, all partners in an LLP have limited liability, from errors, omissions, negligence, incompetence, or malpractice committed by other partners or by employees.

Of course, any partners involved in wrongful or negligence acts are still personally liable, but other partners are protected from liability for those acts.

In an LLP, all partners have the same general management responsibilities. Because an LLP is a partnership, the flexibility of management in an LLP is not the same as with a limited liability company.

Many professionals form LLPs, because they are protected to some degree from being involved in a malpractice suit against another partner.

How to Form a Limited Liability Partnership

Like other types of partnerships, a limited liability partnership is formed in the state in which the partnership does business. Most states have the business filings section in the office of the secretary of state for your state or equivalent department.

The partnership must register as a specific LLC in the state, filing a form as a "limited liability partnership" or similar type of declaration. The partnership should also create a partnership agreement to spell out how to run the partnership and what happens in various circumstances. 

Most states allow all professionals to form LLP's; a few states limit the ability to form an LLP to accountants and attorneys.

Common Confusion: Don't confuse an LLP with a limited partnership or a limited liability company (LLC). A limited partnership is a type of partnership with both general partners and limited partners.  An LLC is a different type of business, with members instead of partners. An LLC with multiple members, though, is taxed as a partnership.