Form an LLP in Delaware: American LLP vs. LLC

What Are The Adventages To Establish an LLP in Delaware? Why You Should Form an LLP in the State of Delaware

An American limited liability partnership or LLP is a relatively new creation that operates much like a limited partnership, but allows the members of the LLP to take an active role in the business of the partnership, without exposing them to personal liability for others' acts except to the extent of their investment in the LLP. Many law and accounting firms now operate as LLPs.

When choosing a business form, you may want to consider the limited liability partnership (LLP), one of the newest entity options. While the LLP is similar to the limited liability company (LLC), there are some important differences that may make the LLP an inappropriate choice for the small business owner. In many states, owners of an LLP have only a reduced form of limited liability from the claims of the business's creditors.

This "limited shield," as it is sometimes called, does not afford the owners the same protection they would enjoy in either the LLC or the corporation. In addition, in many states, the business interests of the owners of an LLP are afforded less protection from the claims of the owners' personal creditors, as compared to the LLC. We recommend reviewing this site in its entirety, so that you are knowledgeable of the USA jurisdiction and the powers granted to American LLPs.

Historically, the selection of a business entity started with a simple question: Should you incorporate your practice? If you decide this isn't necessary, you can practice either as a sole proprietorship or in a partnership. Either way, you have less paperwork while all of your practice income is passed through to your personal tax return; that is, you won't have to pay a corporate income tax.

Recently, the choice of business entity has become even more complicated. You can operate your practice as a limited liability company (LLC), which offers the asset protection of a corporation along with the tax flexibility of a partnership. In some states, professionals are not allowed to practice as an LLC but can create a limited liability partnership (LLP), which is similar.

With all the emphasis on corporations and LLC's, is there any room for limited liability partnerships (LLP's), which are first cousin to LLC's? The LLP form has been adopted by some professional firms. LLP's protect each partner's personal assets from exposure to the misdeeds of other partners or employees. In some states this protection is limited to malpractice claims, while in others it includes protection from trade creditors as well.

In general, LLP's make sense in states where doctors can't form LLC's or in cases where a practice is already set up as a partnership: for an existing partnership, going to an LLC might mean starting over with new documents relating to procedures, profit-sharing formulas, etc. If you are going to make such a switch, be sure that you are going to get your money's worth in terms of asset protection, operating flexibility and ongoing tax savings. Finally, California and New York limit the use of LLPs to professionals, thus eliminating the LLP as a choice for other business owners. (In California, the term "professionals" is defined narrowly to include only lawyers and accountants, further restricting the availability of the LLP there).

We will guide you through the process of registering your LLP and establishing your registered identity. Complete and submit an LLP application form. Adequate completion and submission of this form, along with the provision of payment, will enable Coddan to incorporate your proposed American LLP within five business days. We will express mail your documents to the mailing address you specify in your incorporation order.

Create an LLP In Delaware: Coddan Is The Registered Expert For Delaware LLPs - Limited Liability Partnerships

An LLP gives the benefits of limited liability in that it can protect your existing personal assets, while giving many of the Tax advantages of a sole trader partnership. The LLP will be a separate legal entity and while the LLP itself will be liable for the full extent of its assets the liability of the members will be limited. Under certain circumstances, however, claims for economic loss could be made against individual members who have been negligent. Any such claim would be a civil action outside the contract as the party would have contracted with the LLP.

When choosing a business form, you may want to consider the limited liability partnership (LLP), one of the newest entity options. While the LLP is similar to the limited liability company (LLC), there are some important differences that may make the LLP an inappropriate choice for the small business owner. In many states, owners of an LLP have only a reduced form of limited liability from the claims of the business's creditors.

This "limited shield," as it is sometimes called, does not afford the owners the same protection they would enjoy in either the LLC or the corporation. In addition, in many states, the business interests of the owners of an LLP are afforded less protection from the claims of the owners' personal creditors, as compared to the LLC. Finally, California and New York limit the use of LLPs to professionals, thus eliminating the LLP as a choice for other business owners. (In California, the term "professionals" is defined narrowly to include only lawyers and accountants, further restricting the availability of the LLP there).

Many years ago, the law prohibited professionals such as accountants and lawyers from operating in the corporate form. As a result, virtually all of the largest and oldest CPA and law firms in this country were formed and operated as general partnerships. This, of course, meant that the general partnership had unlimited personal liability for all of the business's debts, but professionals who wanted to form a business with each other had no other choice. When the law was finally changed to allow professionals to incorporate, many firms were reluctant to make the change for tax reasons, since the federal tax law deems a conversion from one form (partnership) to another form (corporation) a potentially taxable event.

In addition, such a conversion would involve re-titling all of the firm's assets from the general partnership to the new corporation. These large general partnerships have offices in every major city in the country, hundreds of partners and millions of dollars of assets. Accordingly, the transfer process alone would be complex and expensive enough to dissuade these forms from making the conversion.

Similarly, it was believed that the Internal Revenue Service might deem conversion from a general partnership to an LLC to be a conversion to another form, and thus a taxable event. Through lobbying by accounting firms, law firms and other professionals operating in the general partnership form, the limited liability partnership (LLP) was developed. The conversion process from a general partnership to an LLP is unique in the law.

Establish An LLP In Delaware: LLP vs. LLC - Which Is The Better Choice?

This brings up the question of why would you want an LLP over an LLC. In some states, the answer is simple. The professional regulatory body for your profession may prohibit you from forming an LLC, but not an LLP. In a case like this, the LLP at least gives you malpractice protection (compared to running naked in a regular partnership) and may also give you contract liability protection, depending on your particular state.

Even if both LLP and LLC entities are available to you, converting a general partnership to an LLP can potentially be much easier than conversion to an LLC. Many states in their LLP act provide that an existing partnership can convert over simply by paying a fee and registering the existing entity as an LLP (generally with the Secretary of State). In contrast, in many states, the conversion of a general partnership to an LLC will require the liquidation or merger of the old partnership in the process of the formation of the LLC.

While this is certainly not an insurmountable task, few would choose to voluntarily subject themselves to the process if it can be avoided. In states where the ultimate protections afforded an LLP are not different than that of an LLC (i.e., both malpractice and contract liability protection) then there is no good reason to spring for the LLC. However, if you are not in a state that provides contract liability protection for LLPs then converting to an LLC may be worthwhile, even if liquidation of the old partnership is required. Finally, in a few states (Texas, for example) LLCs are subject to rather harsh entity level taxes like a franchise or excise tax, whereas an LLP is not.

Start-Up An LLP In Delaware: Limited Liability Partnership vs. Professional Corporation

When are LLPs a better choice than a professional corporation? First, by definition in most states, to have an LLP requires at least two partners (it is a partnership after all). If you are a sole practitioner of your service and desire limited liability, then you will need to form a professional corporation, or if your state licensing board permits it, an LLC.

In cases where there are two or more partners, an LLP will give more flexibility in the distribution of profits compared to a professional corporation. In a professional corporation, corporation law requires profits to be distributed precisely in the ratio of the stock holdings, which in turn are generally proportional to the amount of capital invested. If you have an arrangement where a personalized profit sharing arrangement is desired, then an LLP will give you great flexibility in doing so, compared to the rather demanding restrictions of a professional corporation.

It is true that you can adjust the profit payout in a Professional Corporation by giving one owner a higher salary than another, but then you eliminate one the best reasons for forming a PC, which is the ability to reduce FICA taxes through the use of lower but still reasonable salaries. Many professional organizations desire both reduced FICA taxes and profit sharing flexibility. In other cases, they simply desire to have a common name for marketing purposes and to share office overhead expense, while each owner runs what is essentially their own practice separately.

In cases such as this, a good plan is to form a master LLP or LLC. The owners each form their own professional corporation and contract with the master LLP to provide services. Common overhead expenses and billing are run through the LLP and then the remainder of the profit is parceled out through the service contracts to each professional corporation, according to their own actual earnings.