The legal structure of a company defines the responsibilities and liabilities of the individuals within the company. A limited liability partnership (LLP) allows for some (or all) of the partners to have limited liabilities. Different from a traditional partnership, the LLP allows partners to not be held responsible for their partner’s misconduct or negligence. It can vary from state to state, as well as country to country in the specific responsibilities and requirements for the LLP, but it is a viable option for many companies to operate under. In an LLP, any profits are shared among the partners for tax purposes.
This hybrid organizational structure combines the strength of a corporation’s legal liability with the flexibility of a partnership. An LLC is not taxed as a separate entity. The profits and losses are passed to the members of the LLC – similar to the way a partnership is handled. From a legal perspective, the LLC has limited liability. From an accounting and tax standpoint, the LLC can be treated as an S corp.
The advantages of an LLC make this an attractive choice for many corporations. The LLC protects its members from personal liability as a result of the misdeeds of others within the organization. Another benefit is the small amount of paperwork required. Finally, the LLC offers members the ability to distribute profits the way they want to. The members of the LLC will decide the percentages of profit sharing and the benefits that are afforded to each member.
Disadvantages are few: employees are considered self-employed, requiring them to pay their own taxes and there is no protected path of succession. When a member of the LLC leaves, the corporation is dissolved. The members are legally obligated to finalize any dealings the company may have had and then close down the business.