Similar to Limited
Liability Company(s) (LLCs), Limited
Liability Partnerships (LLPs) are organized under state law and offer a
degree of liability protection for individual partners. For Federal tax
purposes, Limited
Liability Partnerships (LLPs) follow the same entity classification rules as Limited
Liability Company(s) (LLCs). A
Limited Liability Partnership (LLP)
may elect to be treated as a corporation by filing Form 8832. If no
election is made, the Limited
Liability Partnership (LLP) is treated as a partnership and files Form 1065.
Limited
Liability Partnership(s) (LLPs) are similar to Limited
Liability Company(s) (LLCs)
• Both are granted limited liability
status under state statutes.
• Both are easy to organize in comparison
to corporation formation.
• Both are treated as partnerships for
federal tax purposes provided they do not elect to be treated as
corporations by filing Form 8832.
• Both are relatively new forms of
business entities compared to general partnerships, limited partnerships,
and corporations.
• In many states, Limited
Liability Partnership (LLP) and Limited
Liability Company (LLC) statutes
parallel each other in the way state franchise taxes are imposed.
Limited
Liability Partnership (LLP) Rules That Differ From Limited
Liability Company (LLC) Rules
Liability: In certain states, Limited
Liability Partnership (LLP) laws differ from Limited
Liability Company (LLC) laws in the degree of liability protection. In general, Limited
Liability Company(s) (LLCs) and corporations limit the liability to an owner’s investment in
the business; plus the owner’s individual negligence or malpractice. Limited
Liability Partnership (LLP) laws generally provide liability protection against the malpractice of
other partners. However, an Limited
Liability Partnership (LLP) partner may still be jointly and
severally liable for the contractual debts of the business.
Newer state Limited
Liability Partnership (LLP) laws have extended
liability protection to the partnership’s contractual debts that exceed
the value of the owner’s investment interest in the Limited
Liability Partnership (LLP). However, many
states require Limited
Liability Partnerships (LLPs) to obtain a certain level of liability insurance.
Limited
Liability Partnership (LLP) Professional Firms: Many state
statutes do not allow professional firms (such as, accounting practices,
law firms, medical practices) to form an entity other than a general
partnership. Many state accountancy rules mandate a general partnership as
the only structure for the practice of accounting which includes Limited
Liability Partnerships (LLPs) and
not Limited
Liability Company(s) (LLCs).
State Tax: Some states tax Limited
Liability Partnerships (LLPs) as
partnerships, and Limited
Liability Company(s) (LLCs) as corporations.
State franchise taxes are higher for Limited
Liability Company(s) (LLCs) in certain states than for Limited
Liability Partnerships (LLPs).
Ease of Formation: Existing
partnerships in certain states can be converted to a Limited
Liability Partnership (LLP) simply by
amending their partnership agreement and registering as an Limited
Liability Partnership (LLP) with the
Secretary of State. Forming a Limited
Liability Company (LLC) requires creating a new entity.
Conversion To LLP Status
For Federal tax purposes, converting a
general partnership into an Limited
Liability Partnership (LLP) will follow the same rules as converting a
general partnership into an Limited
Liability Company (LLC). The partnership does not
terminate and the Limited
Liability Partnership (LLP) continues to file Form 1065 as the same partnership.
[IRS Letter Ruling 9448026]
