What Is an LLP Company?
- An LLP company protects its partners, owners, against liability from negligence, omissions and errors caused and made by the other partners as well as those made by employees of the LLP -- not directly under their supervision. Limited partners who take part in the day-to-day operations of the LLP company lose the limited liability protection. State laws regarding LLP companies vary based on the type of business the company performs; not all types of businesses are eligible to operate under an LLC structure in all states.
- Partner/owners in an LLP company are compensated for their participation in the company based on the services that they perform, not on a profit sharing basis, which is customary under an LLC structure. LLP companies are not legally allowed to compensate its owners as employees. Instead LLP companies compensate owner/partners via guaranteed payments. The guaranteed payments are allocated irrespective of the LLP profits. LLP owner/partners are not allowed to participate in certain employee benefit programs such as group life insurance, disability insurance and meal or lodging plans.
- An LLP company has the option to pay taxes through a corporation taxation structure or a pass-through taxation structure. Pass-through taxation means that the profits and losses of the LLP are not reported by the company, but are reported by the individual partners/owners of the company. Guaranteed payments to partner/owners are not subject to income tax withholding, but are subject to self-employment taxes.
- The filing and reporting requirements for an LLC company vary by state. Most states require the LLP company to file annual reports and pay annual fees as well as to maintain liability insurance to maintain their legal status. Starting an LLP company can be as simple as filing one form with the state and remitting the filing fee. Any existing business may be converted to an LLP as long as there is more than one owner involved. Companies already doing business as a corporation may incur negative tax consequences initially, but the effects may be minimized through time with the advice of tax professionals.
