Limited Liability Partnership: Legal Attributes/Formalities 

Accountants, attorneys, architects, engineers and land surveyors may operate as a “limited liability partnership” (LLP), which is a hybrid form of general partnership. The principals can all participate in management (as in a general partnership) and yet still enjoy limited liability (as in a limited partnership) and partnership pass-through tax treatment. LLPs are governed by the Uniform Partnership Act of 1994 under the California Corporations Code, Title 2, Chapter 5, Article 10.

An LLP generally protects owners from personal liability for the ordinary business debts of the entity but keep in mind that each principal remains liable for individual misconduct under civil and criminal laws.

As a practical matter, an LLP is simply a general partnership that has filed a statement of qualification. Most statutes expressly state that an LLP is not a distinct form of entity but rather a general partnership. However, unlike a general partnership, an LLP must file form LLP-1 with the Secretary of State in order to obtain the status as an LLP. By making such a filing, the LLP, like corporations, LLCs and limited partnerships, becomes subject to the laws of California, which will govern the internal relations and liability of the partners. All states permit LLPs although some states like California limit their use to professionals. Lastly, although no partnership agreement is required, it is recommended that a partnership agreement be drafted to include all pertinent terms and arrangements.

LLP: Formation Start Up Cost

The initial CA state-filing fee for the LLP-1 form lists at $70. However, keep in mind that filings with the appropriate state agency for the profession will also require an additional fee (e.g., State Bar of California: $50 fee per partner). For service of process, an agent must be designated that is either an individual who resides in California or a California registered corporate agent. Please use the following Comparison Chart for side by side comparison.

LLP: Tax Attributes

LLPs can elect the tax advantages of a partnership––i.e., pass-through taxation. Because of this pass-through taxation, the entity itself is exempt from federal taxation but still subject to one state level tax–the annual $800 franchise tax fee. Once the partnership expenses and state franchise tax have been deducted, the remaining balance of profit is allocated to the partners. As with all partnerships, the LLP must declare its operating losses and profits to the IRS and then each partner must file their respective individual taxes (similar to an S-corp yet more complicated than a single-member LLC filing).  It should be noted that in addition to state and federal income taxation, the partners are subject to self-employment tax on all income (no allocation between distribution and salary).

Please use the following Entity Selection Tax Cheat Sheet to predict your tax liability.

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