What is an LLP? Limited liability partnership explained

Published Tuesday 9 June 2026

Table of contents

• What is a partnership?
• What is a limited liability partnership?
• LLP vs LLC: key differences
• LLP vs limited partnership
• LLP vs general partnership
• What professions use LLPs?
• Benefits of forming an LLP
• Disadvantages of an LLP
• How to start an LLP
• Is an LLP right for you?
• Manage your LLP finances with Xero
• FAQs on LLPs

Key takeaways

• A limited liability partnership (LLP) protects each partner's personal assets from the business debts and malpractice claims of other partners, while offering pass-through taxation where profits flow directly to partners' personal tax returns.
• LLP formation is typically available to licensed professionals such as lawyers, accountants, doctors, and consultants, though requirements vary by state.
• A solid partnership agreement is essential. It should define partner roles, capital contributions, profit sharing, liability terms, and exit strategies before you begin operating.
• To form an LLP, you need to choose a unique business name, designate a registered agent, draft a partnership agreement, file state paperwork (fees typically range from $50 to $500 or more), and obtain an employer identification number (EIN).

What is a partnership?

A partnership is a business structure where 2 or more people own and operate a business together. Each partnership type offers a different balance of liability protection, management control, and tax treatment.

Common partnership types include:

• General partnerships: all partners share management duties and personal liability for business debts
• Limited partnerships (LPs): a mix of general partners who manage the business and limited partners who invest capital without taking an active role
• Limited liability partnerships (LLPs): professional service partnerships where each partner has liability protection from the actions of other partners
• Limited liability companies (LLCs): a hybrid business structure that combines corporate liability protections with flexible tax options

What is a limited liability partnership?

A limited liability partnership (LLP) is a formal business structure in which 2 or more partners share ownership while each partner is shielded from personal liability for the negligence, malpractice, or debts caused by other partners. It works by combining the pass-through tax benefits of a traditional partnership with the personal asset protection typically associated with a corporation.

Some key features of LLPs are:

• Tax treatment: profits pass through to each partner's personal tax return, avoiding double taxation at the business level
• Liability protection: your personal assets, such as your home and savings, are protected from claims arising from another partner's actions
• Management structure: all partners can participate in day-to-day business decisions without risking their limited liability status
• Professional focus: commonly used by lawyers, accountants, architects, and consultants

Unlike a general partnership, where each partner can be held personally responsible for all business obligations, an LLP limits that exposure. You're still responsible for your own actions and any debts you personally guarantee, but you're not on the hook for another partner's mistakes.

LLP vs LLC: key differences

When choosing a business structure, many owners weigh the limited liability partnership (LLP) against the limited liability company (LLC). Both offer personal liability protection, but they differ in formation, taxation, management, and availability.

Formation requirements

The paperwork and process for forming each structure varies.

• LLP: requires filing a Certificate of Limited Liability Partnership (or equivalent) with the state; must have 2 or more partners
• LLC: requires filing Articles of Organization; can be formed by a single member or multiple members
• LLP: many states require professional licensing or restrict LLPs to specific professions
• LLC: available to virtually any type of business in all 50 states

Liability protection

Both structures protect personal assets, but the scope of protection differs.

• LLP: protects individual partners from liabilities caused by other partners, such as malpractice claims or negligence
• LLC: provides a broader liability shield, protecting members from most business debts and legal claims against the company
• LLP: in some states, partners may still share liability for general business debts like leases or loans
• LLC: members are generally not personally liable for business debts unless they sign a personal guarantee

Tax treatment

These structures differ in how much tax flexibility they offer.

• LLP: taxed as a partnership by default; profits pass through to partners' personal returns
• LLC: can choose to be taxed as a sole proprietorship, partnership, S-corp, or C-corp, giving it more flexibility
• LLP: partners pay self-employment tax on their share of profits
• LLC: members who elect S-corp taxation may reduce self-employment tax by splitting income between salary and distributions

For an LLC to be classified as a partnership for federal income tax purposes, it must lack at least 2 of 4 key corporate characteristics. This gives LLCs significant flexibility in how they're taxed. You can learn more about S-corp vs LLC tax structures to see which option may work best for your situation.

Management structure

How the business is run day to day also differs between these 2 structures.

• LLP: all partners typically participate in management and decision-making equally
• LLC: can be member-managed (all owners involved) or manager-managed (appointed managers run the business)
• LLP: management rights are governed by the partnership agreement
• LLC: management rights are governed by the operating agreement

Ownership rules

The rules for who can own and join each structure vary.

• LLP: must have at least 2 partners; ownership is often restricted to licensed professionals depending on the state
• LLC: can have a single member or many members, with no professional licensing requirements in most states
• LLP: adding or removing partners may require amending the partnership agreement and notifying the state
• LLC: membership changes are governed by the operating agreement and may be simpler to execute

State availability

Where you can form each structure also plays a role in your decision.

• LLP: available in all 50 states, but many states restrict LLPs to licensed professionals such as lawyers, accountants, and doctors
• LLC: available in all 50 states with no professional restrictions
• LLP: in states like California, many licensed professionals cannot use an LLC and must form an LLP or professional corporation instead
• LLC: some states offer specialized professional LLCs (PLLCs) for licensed professionals who prefer the LLC structure

LLP vs limited partnership

A limited partnership (LP) and a limited liability partnership (LLP) sound similar, but they serve different purposes and offer different levels of protection and involvement for partners.

An LP combines active management partners with passive investors. General partners run the business and carry unlimited personal liability, while limited partners contribute capital but don't manage daily operations. Their liability is limited to the amount they invested.

Key differences between the 2 structures include:

• Partner roles: in an LP, general partners manage the business while limited partners are passive investors; in an LLP, all partners can actively manage without losing liability protection
• Liability exposure: LP general partners face unlimited personal liability; LLP partners are each protected from the actions and debts of other partners
• Common uses: LPs are often used for investment vehicles like real estate, film production, and venture capital; LLPs are used by professional service firms
• Decision-making: limited partners in an LP typically have no say in management; LLP partners share decision-making authority

LLP vs general partnership

A general partnership is the simplest form of partnership, but it comes with significant personal risk. Understanding the differences can help you decide whether an LLP's added protections are worth the extra filing requirements.

Liability differences

Liability is the biggest distinction between these 2 structures.

• General partnership: every partner is personally liable for all business debts and the actions of other partners, including malpractice and negligence
• LLP: each partner is protected from personal liability for the wrongful acts, negligence, or malpractice of other partners
• General partnership: creditors can pursue any partner's personal assets to satisfy business debts
• LLP: personal assets like your home and savings are generally shielded from claims against other partners

Formation requirements

The effort required to set up each structure is quite different.

• General partnership: can be formed with a verbal or written agreement between partners; no state filing is required in most states
• LLP: requires formal registration with the state, including filing a Certificate of Limited Liability Partnership and paying registration fees
• General partnership: no annual reporting or renewal requirements in most states
• LLP: most states require annual or biennial reports and renewal filings to maintain active status

Tax treatment

Both general partnerships and LLPs receive pass-through tax treatment, so the business itself doesn't pay income tax.

• General partnership: files an informational return (Form 1065) with the IRS; profits pass through to partners' individual returns
• LLP: files the same informational return (Form 1065); profits also pass through to partners' individual returns
• Both structures: partners pay self-employment tax on their share of business profits
• Both structures: profit distribution is governed by the partnership agreement

What professions use LLPs?

Professional service firms use LLPs to combine expertise while protecting each partner's personal assets from the mistakes or malpractice of their colleagues.

Common LLP professions include:

• Law firms: attorneys practicing together
• Accounting firms: certified public accountants (CPAs) and tax professionals
• Medical practices: doctors and healthcare providers
• Consulting firms: business and technical advisors
• Architecture firms: licensed design professionals

All 50 states allow LLP formation, but some states have additional requirements or restrictions. For example, many licensed professionals in California cannot use an LLC and often choose an LLP or professional corporation instead. Both California and New York require state licenses for professional services as well.

Benefits of forming an LLP

LLP benefits center on liability protection and tax advantages that help professional partnerships operate more effectively.

Liability and personal asset protection

Personal asset protection shields your home, savings, and other personal property from business debts caused by other partners.

Protection levels include:

• Investment limit: your liability is typically limited to the capital you contributed to the partnership
• Partner actions: you're protected from other partners' mistakes or malpractice claims
• State variations: some states hold partners liable for certain general partnership debts, so check your state's rules
• Professional example: a medical partner in an LLP is protected from a colleague's malpractice claims

Tax treatment

Pass-through taxation means the LLP itself doesn't pay business income tax. Instead, profits flow directly to each partner's personal tax return.

Here's how the tax process works:

• Partnership return: the LLP files an informational return (Form 1065) with the IRS
• No business-level tax: the partnership pays no income tax at the entity level
• Individual taxation: each partner reports their share of profits on their personal tax return and pays tax at their individual rate
• Profit distribution: how profits are split is determined by the partnership agreement

Fewer administrative tasks than corporations

LLPs require less paperwork and fewer compliance duties than corporations. There are typically fewer board meeting requirements, no mandatory shareholder reports, and simpler annual filing obligations.

Freedom to choose partners and profit distribution

You can share profits in any way you all agree on in the partnership agreement. The agreement should set out how you make decisions and who has authority to manage different parts of the business. In many cases, partners share management equally or based on their areas of expertise.

Disadvantages of an LLP

While LLPs offer significant benefits, there are some drawbacks to consider before choosing this structure.

State availability limitations

Not every state treats LLPs the same way. Many states restrict LLP formation to licensed professionals, which means businesses outside of fields like law, accounting, and medicine may not be eligible. Some states also offer weaker liability protections for LLP partners than others, so your level of protection depends on where you register.

Self-employment tax

All LLP partners pay self-employment tax on their share of the partnership's profits. Unlike an LLC that elects S-corp taxation, there's no option to split income between salary and distributions to potentially reduce your self-employment tax burden. For high-earning partners, this can result in a significant tax bill.

No perpetual existence

An LLP doesn't automatically continue if a partner leaves, retires, or passes away. Unless the partnership agreement specifically addresses succession, the departure of a partner could trigger dissolution. Planning ahead with clear buyout and continuation terms in your agreement is essential.

Potential for partner disputes

Because all partners typically share management responsibilities, disagreements over business direction, spending, or strategy can slow down decision-making. A thorough partnership agreement that outlines voting rights, dispute resolution processes, and decision-making authority can help prevent these conflicts.

Higher costs than a general partnership

Forming an LLP involves state registration fees (typically $50 to $500 or more), legal costs for drafting a partnership agreement, and ongoing annual filing or renewal fees. These costs are higher than a general partnership, which can often be formed with no state filing at all. Annual partnership tax returns also cost more to prepare than a sole proprietor tax return.

How to start an LLP

LLP formation typically takes 2 to 6 weeks after you submit your paperwork, though timelines vary by state. Some states offer expedited processing for an additional fee. Follow these steps to get started.

1. Choose a business name

Your business name must be unique and comply with your state's naming rules. Most states require the name to include "Limited Liability Partnership," "LLP," or "L.L.P." as a designation.

• Check name availability with your state's Secretary of State office
• Search the United States Patent and Trademark Office (USPTO) database to avoid federal trademark conflicts
• Consider reserving the name if your state allows it, which typically costs $10 to $50 and holds the name for 60 to 120 days

2. Designate a registered agent

A registered agent is the person or service authorized to accept legal documents and government correspondence on behalf of your LLP. Most states require the agent to have a physical address (not a PO box) in the state where you're registered. You can serve as your own registered agent or hire a professional service, which typically costs $50 to $300 per year.

3. Draft the partnership agreement

Your partnership agreement sets out how you manage and govern the LLP. While not always legally required, it's essential for protecting all partners and preventing disputes.

Your agreement should cover:

• Partner roles: specific responsibilities, decision-making limits, and management authority
• Capital contributions: cash, equipment, skills, and labor each partner brings
• Profit sharing: distribution methods and percentages
• Liability terms: debt responsibilities and contractual obligations
• Exit strategy: buyout procedures, succession plans, and dissolution terms
• Dispute resolution: how disagreements will be handled, such as mediation or arbitration

Consult a qualified attorney when you create your partnership agreement to make sure it's legally binding and covers your state's requirements.

4. File state paperwork

You'll need to file formation documents with your state. The specific requirements and fees vary.

• Formation documents: most states require a Certificate of Limited Liability Partnership or similar filing (costs range from $50 to $500 or more depending on the state)
• Professional licenses: if your state restricts LLPs to licensed professionals, you'll need to provide proof of appropriate credentials
• Processing times: standard processing takes 1 to 4 weeks in most states; expedited options are often available for an additional $25 to $100

5. Get an employer identification number (EIN)

An employer identification number (EIN) is required for tax filing, hiring employees, and opening a business bank account. You can apply for free directly on the IRS website, and online applications are processed immediately. You'll need your LLP's legal name, address, and the Social Security number of a responsible party.

6. Open a business bank account

Keeping your LLP's finances separate from personal accounts is essential for maintaining your liability protection. You'll need your EIN, formation documents, and partnership agreement to open a business bank account.

7. Obtain insurance and permits

Depending on your profession and location, you may need additional coverage and permits.

• Malpractice insurance: required or strongly recommended for professional service firms
• Workers' compensation: required in most states if you have employees
• Local permits: check with your city and county for any business licenses or permits required in your area

8. Maintain ongoing compliance

LLPs have fewer compliance requirements than corporations, but there are still key obligations to stay on top of. A US Government Accountability Office (GAO) report noted that some states require specific information on members during formation, highlighting the importance of understanding local regulations.

Your ongoing compliance checklist should include:

• Filing annual or biennial reports with the state
• Reporting and paying employment taxes
• Maintaining the partnership agreement at your principal office
• Renewing professional licenses and business permits
• Notifying the state of any significant changes to the partnership
• Filing your annual partnership tax return (Form 1065)

An accountant can help with many of these tasks. Find experienced accountants and bookkeepers in the Xero advisor directory.

If you do business in more than one state, you may need to register your LLP in each of those states. To register in another state, you usually need to file a Certificate of Authority there, and some states require a Certificate of Good Standing from the state where you first formed the LLP.

Is an LLP right for you?

Choosing the right business structure depends on your profession, the number of partners involved, and how much liability protection you need. Here are some questions to help guide your decision.

An LLP may be a good fit if:

• You're a licensed professional (such as a lawyer, accountant, or doctor) looking to practice with other professionals
• You want personal asset protection from other partners' malpractice or negligence
• You prefer a management structure where all partners have an equal say in business decisions
• You want pass-through taxation without the complexity of a corporate structure

An LLP may not be the best choice if:

• You're operating a business outside of a licensed profession, as your state may not allow it
• You want the flexibility to choose your tax classification (an LLC offers more options)
• You're looking for a business structure that can continue indefinitely without depending on partner involvement
• You're a solo business owner, since LLPs require at least 2 partners

If an LLP doesn't fit your needs, consider alternatives like an LLC, which offers broader liability protection and more tax flexibility, or a sole proprietorship if you're working on your own.

Manage your LLP finances with Xero

Setting up your LLP is a big step toward protecting your personal assets and building a successful practice. Once you're registered, the next priority is managing your finances with the same level of care. Xero gives you the tools to track partner distributions, manage expenses, and get a clear view of your financial health, so you can focus on serving your clients.

See how Xero makes it easy to run your business, not just your books. Get one month free.

FAQs on LLPs

Here are answers to frequently asked questions about LLPs.

How do I pay myself as a partner in an LLP?

LLP partners receive profit distributions, not salaries. Payments come directly from business profits according to your partnership agreement, typically based on capital contributions and agreed percentages. Each partner then reports their share on their personal tax return.

What is the difference between a limited partnership and an LLP?

In a limited partnership, general partners manage the business with unlimited liability, while limited partners are passive investors whose liability is capped at their investment. In an LLP, all partners can actively manage the business and each partner is protected from the other partners' liabilities.

What is an example of an LLP?

Many large law firms and accounting firms operate as LLPs. For instance, a group of 5 CPAs might form an LLP so they can share office space, staff, and clients while ensuring that if one partner faces a malpractice claim, the other partners' personal assets are protected.

Who can form an LLP?

In most states, any 2 or more competent adults can form an LLP. However, many states restrict LLPs to licensed professionals offering services that require special credentials, such as attorneys, accountants, doctors, and architects. Check your state's specific requirements before filing.

How is an LLP taxed?

An LLP is taxed as a pass-through entity. The partnership files an informational return (Form 1065) with the IRS, but doesn't pay income tax at the business level. Each partner reports their share of profits on their personal tax return and pays income tax and self-employment tax at their individual rates.

How much does it cost to form an LLP?

State filing fees typically range from $50 to $500 or more, depending on the state. You should also budget for legal fees to draft a partnership agreement, registered agent services ($50 to $300 per year), and ongoing annual report filing fees. The total startup cost for most LLPs falls between $500 and $2,000.