Definition and Characteristics of Limited Liability Partnership
Limited Liability Partnership (LLP):
In this post, we are discussing about Definition and Characteristics of Limited Liability Partnership . Partnerships are the most common business structure for businesses that have more than one owner. Many of the businesses, ranging from retail stores to accounting firms, are structured as partnerships. A business partnership is a for-profit business established and run by two or more individuals. There can be any number of partners involved in the business, as long as there are at least two. A business partner is a co-owner of the business. LLP is to be registered at MCA just like Companies.
Most business partnerships are general partnerships, meaning that all partners have responsibility for the business and unlimited liability for the financial obligations of the business. This means that general partners share both the benefits and the detriments of the business.
However, some types of partnership allow at least one owner limited personal liability for the business’ financial obligations, such as debts and court judgments. One common structure is the limited liability partnership, or LLP. A limited liability partnership is a newer form of business partnership where all of the owners have limited personal liability for the financial obligations of the business.
There are no general partners in a limited liability partnership, but an LLP is similar to a general partnership. Each limited liability partner contributes to the everyday business operations. However, each partner enjoys limited personal liability for the other partners’ acts. All states allow some form of LLP, though state laws vary. Note that some states only allow LLP status for professional partnerships, like accountants, lawyers or architects.
Let’s use an example. Let’s say that Ben, Bob and Brandi are all lawyers. They decide to form a law firm as partners and each of them will contribute $50,000 to form a limited liability partnership. All of them will each work at the law firm and earn money for the firm.
Why LLP is needed ?
For a long time, a need has been felt to provide for a business format that would combine the flexibility of a partnership and the advantages of limited liability of a company at a low compliance cost. The Limited Liability Partnership format is an alternative corporate business vehicle that provides the benefits of limited liability of a company but allows its members the flexibility of organizing their internal management on the basis of a mutually arrived agreement, as is the case in a partnership firm.
This format would be quite useful for small and medium enterprises in general and for the enterprises in services sector in particular. Internationally, LLPs are the preferred vehicle of business particularly for service industry or for activities involving professionals.
An LLP is similar in some ways to a standard Partnership, except that the individual members have lower liabilities to any debts which may arise from running the business. There are more administrative duties involved compared to the Partnership business structure.
In fact, an LLP is more similar to operating a Limited Company. In terms of liability, the Limited Liability Partnership is itself liable for debts run up in running the business, rather that the individual members of the LLP. As a result, LLP’s are only recommended for profit running businesses. Individuals or existing businesses can be members of a Limited Liability Partnership, and the LLP must have at least 2 members. The rights and responsibilities of all members would usually be laid out in a “Deed of Partnership“.
Key Characteristics of Limited Liability Partnership:
Some of the key features of LLP,s are:
1. LLP is a separate legal entity from their Members.
2. LLP have the benefit of limited liability for their Members.
3. Tax provisions for LLP are same as partnership.
4. LLP have the organizational flexibility of a partnership.
5. Any agreement (“LLP agreement”) between the Members governing the operation of the LLP is a private document which is confidential to the Members.
6. LLP must have at least two “designated” Members.
7. Their “trading disclosure” requirements are similar to those of a company.
8. LLP must be registered at MCA.
9. Their accounting and filing requirements are similar to those of a company.
10. LLP have the ability to create floating charges.