10 Compelling Reasons to form a Limited Liability Partnership (LLP)

Jul 16, 2014
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Limited-Liability-PartnershipProfessionals, who want to start a business by the way of services they would provide, usually set up limited liability partnerships (LLP). Such people require a state license in order to practice. To give a few examples, accountants, doctors, attorneys, architects, chiropractors, dentists, etc. are the ones who prefer to set up this type of business. This factor significantly limits the number of people who have the option of forming an LLP as a business structure.

The working of an LLP is similar to that of an LLC, in the way that the partners do not remain liable for the debts and liabilities incurred by the business. An added advantage of the LLP is that, it has the flexibility to choose either a centralized or a completely decentralized management structure.

Leaf through some of the reasons given below for forming a limited liability partnership (LLP) –

1)      There is no restriction on the number of partners that can be included in the formation of an LLP

2)      Partners are safeguarded from being personally held responsible for the business debts and liabilities

3)      An LLP provides organizational flexibility, particularly for the partners who are planning to move in or out of the hierarchy

4)      Flexibility is also seen in terms of deciding amongst the partners their level of contribution, depending upon their experience in their relevant fields

5)      An LLP has the freedom to own certain assets which the traditional partnerships do not have

6)      An LLP removes the possibility of payment of double taxes because the taxes are paid at the individual level

7)      An LLP is easier to form and required less paperwork and even lesser legal formalities

8)      It is easier for the traditional partnerships to get converted into limited liability partnership, as compared to the conversion to an LLC

9)      The members are not charged with Employer’s National Insurance on the LLP profits

10)   The LLP has such an arrangement that the partners can retain their privacy easily

The reasons that compel the entrepreneur to start an LLP are abound, but he should also consider the negative aspects of an LLP. Although not many, these factors should not be neglected. One major aspect is that the funding institutes like banks show hesitance to lend money to an LLP, therefore it becomes difficult for them to raise funds. This to a certain extent dilutes the advantages that an LLP enjoys otherwise.

However, there is an alternative to the dilemma mentioned above. The law permits an LLP to sell its interests (considered as securities) to the unrelated third party firms and raise equity. This eliminates the need for an LLP to request an investor and get him to invest in the partnership. This phenomena acts just like selling the shares of stock in a public corporation to investors over a stock exchange.

Therefore, it is recommended that the entrepreneur should take a choice only after weighing all the pros and cons of a business structure, before incorporating any one of them. After the process of incorporation is done, it becomes very difficult to reverse the process in terms of time, money and the resources that need to be utilized.