Building Your Business Business Taxes What Is a Limited Liability Partnership? Definition & Examples of an LLP By Jean Murray Jean Murray Facebook Twitter Jean Murray, MBA, Ph.D., is an experienced business writer and teacher who has been writing for The Balance on U.S. business law and taxes since 2008. She has taught accounting, business law, and business finance at business and professional schools for over 35 years, has authored several books on saving money and simplifying your business, and was the owner of startup-focused company Emence Enterprises, LLC. learn about our editorial policies Updated on August 12, 2020 Share Tweet Pin Email In This Article View All In This Article What Is an LLP? How an LLP Works LLPs vs. LLCs LLPs vs. Limited Partnerships How to Form an LLP Photo: pixelfit / Getty Images A limited liability partnership (LLP) is a business structure that provides some liability protection for its owners, along with some potential tax breaks and other advantages. It's a structure most commonly used by professionals such as doctors, attorneys, and accountants who go into practice together. Partnerships come in several different types, but all have some common characteristics. An LLP combines some of these advantages of a partnership with the benefits of a corporation. Learn more about how they work and how they compare to other partnerships. What Is a Limited Liability Partnership? An LLP is a form of partnership that limits liability for partners more than some other partnerships do. To understand limited liability partnerships, it's helpful to understand a few things about partnerships in general. All partnerships consist of individuals who have agreed to run a business together under the terms of a partnership agreement. Each partner has invested in the business. Partners are not employees. They take money from the business as distributive shares, not as salaries. 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 losses of the partnership reported on a Schedule K-1. Partners then report their shares of income on their federal personal returns, although not all states allow this type of "pass-through" taxation at the state level. The partnership is a separate legal entity from the partners, but the partners have liability for the actions of the partnership in most cases. This arrangement differs from a corporation, which is separate from its owners with regard to liability. In an LLP, however, partners are shielded from liability for the actions or debts of other partners or employees. Acronym: LLP Note An LLP is not taxed twice, once at the business level and again at the personal level, the way a C corporation is. How a Limited Liability Partnership Works An LLP differs from a general partnership or a limited partnership in that all partners are protected from liability for the wrongful acts or negligence of other partners in an LLP. An LLP combines characteristics of partnerships and corporations, particularly in the area of limited liability. A partnership typically doesn't provide its individual partners with limited liability from lawsuits and debts. In an LLP, however, all partners have limited liability from errors, omissions, negligence, incompetence, or malpractice committed by other partners or by employees of the firm, just as in a corporation. Note Any partners involved in wrongful or negligent acts are still personally liable, but other partners are protected from liability for acts committed by another. Many professionals form LLPs because it protects them from being involved in a malpractice lawsuit against another partner, at least to some degree. Limited Liability Partnership vs. LLCs The most obvious difference between an LLP and a limited liability company (LLC) is that the owners of an LLP are partners. The owners of an LLC are referred to as "members." While partners in an LLP are not typically liable for the debts or negligent acts of other partners, the liability protection for members of an LLC extends to the business's debts as a whole or any legal actions against it in court. Wrongdoing or gross negligence outside the scope of the owner's duties doesn't have liability protection in either type of business—for example, if an owner sexually harasses an employee or client, steals from the company, or physically assaults someone. LLC members can decide between member management and hired management, while partners in an LLP manage the partnership themselves according to the partnership agreement. Additionally, an LLC has several tax options. It can be taxed as a corporation or as an S corporation. An LLP can only be taxed as a partnership. LLPs vs. Limited Partnerships An LLP should not be confused with a limited partnership, which is a different partnership structure. Whereas an LLP limits liability for all partners, a limited partnership only limits it for some. In a limited partnership, at least one owner must be on record as the general partner with unlimited liability, and at least one partner must be listed as a limited partner with limited liability. The limited partner cannot have significant money invested in or hold major decision-making power in the business. If they do, they risk losing their status as a limited partner and forfeiting their limited liability. How to Form a Limited Liability Partnership A limited liability partnership is formed in the state in which the partnership does business. Most states have a business filings section in their office of the Secretary of State or an equivalent department. The partnership must register specifically as an LLP, filing a form as a "limited liability partnership" or a similar type of declaration. The partnership should also create a partnership agreement to spell out how the partnership will be run and what happens in various circumstances. Most states allow all professionals to form LLPs, but a few states limit the ability to form an LLP to only certain professions. Note Not all states recognize "foreign LLPs," those that are formed in other states. These states might treat your LLP as a general partnership instead, which can affect issues of liability there. Key Takeaways A limited liability partnership (LLP) is a business structure that minimizes liability fo the partners and can reduce their tax obligations.It's one of several types of partnerships, each with its own unique structure and benefits.The most specific feature of an LLP is that it shields partners from liability for many of the actions of the other partners. LLPs are most common among professions such as doctors, accountants, and lawyers. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. IRS. "Tax Information for Partnerships." Accessed Aug. 12, 2020. U.S Small Business Administration. "Business Structures—Partnerships." Accessed Aug. 12, 2020. IRS. "Forming a Corporation." Accessed Aug. 12, 2020. U.S. Small Business Administration. "Choose a Business Structure." Accessed Aug. 12, 2020. Nolo. "LLC vs. LLP: What is the Difference?" Accessed Aug. 12, 2020. Nolo. "Limited Partnerships and Limited Liability Partnerships." Accessed Aug. 12, 2020. Nolo. "Why Choose a Limited Liability Partnership (LLP)?" Accessed Aug. 12, 2020.