A limited liability partnership (LLP) is a flexible legal entity that enables two or more individuals with common interests to start a business with limited liability. In other words, an LLP is similar to a conventional partnership, except that it enables the partners to limit their liabilities to the amount they invested into the business. LLPs are common among accountants, lawyers, consultants, and other professional fields where a partnership is preferred to a limited company.
As the name suggested, the primary advantage of forming an LLP is that it protects the partners’ private assets from the liabilities of the business. Therefore, if the partnership fails, creditors cannot go after the partners’ personal assets or income. Unlike a conventional partnership, it serves as a protection to the partners as the LLP goes into debt because their property shall not be seized to cover the business’ liability.
LLP is a separate legal entity to its partners. It can buy, rent, sell and own property, hire staff, and enter contracts with its own name. An LLP can sue or be sued on its own, and each partner in an LLP is not personally responsible for the partnership’s actions. It protects individual partners from the wrongdoings of other partners and potential lawsuits against the LLP. Moreover, the business income earned by an LLP shall be taxed as the LLP’s income instead of the partners’ income. This could be tax advantageous in certain countries, such as Malaysia, as the LLP is entitled to a lower tax rate if conditions are met, and distributions to partners are not taxable in the hands of individual partners.
An LLP offers greater flexibility to its partners than a limited liability company. Partners have the flexibility to negotiate and decide how they will individually contribute to the company, and how they will divide managerial duties among themselves. Partners may also elect to not have managerial authority in the LLP but maintain their ownership rights through their financial contribution.
Due to the special structure of an LLP, its tax filing process and requirements are very different from other forms of entities. Tax authorities in some countries identify LLP as a non-partnership business for tax purposes, while some do not recognise them as a legal entity. Some countries prohibit LLPs, while some enforce heavy tax limits on them. This makes it challenging for partners who wanted to develop their businesses in these countries. The difficulties in tax matters hinder individuals with different tax residency statuses to cooperate in forming an LLP since it is not as clear-cut as a limited company.
Unlike a company, individual partners of an LLP are not obliged to consult with other partners for their business decisions and actions. It is not mandatory for an annual general meeting to be conducted in making significant business decisions in LLPs. As a result, a poor decision and negligent action from any one of the partners could damage the business. Thus, it is important to protect the LLP’s integrity by creating a partnership agreement that outlines the decision-making authority and restrictions for each partner.
It could be more difficult to obtain funding for an LLP as compared to a public company. A person shall be a partner of an LLP for them to contribute capital to the business. However, being a partner could mean certain responsibilities to the business as compared to buying shares of a public company. Therefore, investors like venture capitalists may be less willing to invest in an LLP than a public company.