LLP: What is a limited liability partnership?

Published Thursday 11 December 2025

Table of contents

• What is a partnership?
• What is a limited liability partnership?
• LLP vs LLC: key differences
• What professions use LLPs?
• Benefits of forming an LLP
• Things to consider before forming an LLP
• How to start an LLP
• LLP vs limited partnership
• Managing your LLP finances with confidence
• FAQs on LLPs

Key takeaways

• Recognize that LLPs provide personal asset protection by shielding partners' homes, savings, and other personal property from business debts while offering pass-through taxation where profits flow directly to partners' personal tax returns.

• Create a comprehensive partnership agreement that defines partner roles, capital contributions, profit sharing percentages, liability terms, and exit strategies to protect all partners and establish clear business operations.

• Understand that LLP formation is typically restricted to licensed professionals like lawyers, accountants, doctors, and consultants, with state requirements varying for professional licensing and registration.

• Complete the formation process by choosing a unique business name, designating a registered agent, filing required state paperwork, and maintaining ongoing compliance through annual reports and license renewals.

What is a partnership?

A partnership is a business structure where two or more people own and operate a business together.

Common partnership types include:

• General partnerships: basic shared ownership structure
• Limited partnerships (LPs): mix of general and limited partners
• Limited liability partnerships (LLPs): professional service partnerships with liability protection
• Limited liability companies (LLCs): hybrid business structure with corporate protections

What is a limited liability partnership?

A limited liability partnership (LLP) is a business structure that combines partnership tax benefits with corporate liability protection.

Some key features of LLPs are:

• Tax treatment: profits pass through to partners' personal tax returns
• Liability protection: partners' personal assets are protected from business debts
• Management structure: all partners participate in business decisions
• Professional focus: commonly used by lawyers, accountants, and consultants

LLP vs LLC: key differences

When choosing a business structure, many owners consider both the limited liability partnership (LLP) and the limited liability company (LLC). While both offer personal liability protection, there are important differences to understand.

An LLC is often more flexible. It can be owned by one or more people (called members) and can choose its tax status. For an LLC to be classified as a partnership for federal income tax purposes, for instance, it must lack at least two of four key corporate characteristics, giving it significant flexibility. Management can be handled by the members or by appointed managers.

An LLP, on the other hand, is specifically for partnerships of two or more people. It protects partners from the debts and liabilities of other partners, which is a key reason it's popular with professional firms. In many states, LLPs are restricted to licensed professionals like lawyers and accountants.

What professions use LLPs?

Professional service firms use LLPs to combine expertise while protecting personal assets.

Common LLP professions:

• 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 may have additional requirements. For example, many licensed professionals in California cannot use LLCs and often use LLPs or professional corporations 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 partners' homes, savings, and other personal property from business debts.

Protection levels:

• Investment limit: liability typically limited to capital contributed
• Partner actions: protection from other partners' mistakes or malpractice
• State variations: some states hold partners liable for partnership debts
• Professional example: medical partners protected from colleagues' malpractice claims

Tax treatment

Pass-through taxation means the LLP doesn't pay business income tax. Instead, profits flow directly to partners' personal returns.

Tax process:

• Partnership return:LLP files informational return only
• No business tax: partnership pays no income tax
• Individual taxation: partners pay tax at personal rates
• Profit distribution: taxed based on partnership agreement terms

Fewer administrative tasks than corporations

LLPs require less paperwork and compliance duties than forming a corporation. There are typically fewer reporting requirements as well.

Freedom to choose partners and profit distribution

Partners can share profits in any way you all agree 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. By contrast, an LLC can choose member-managed or manager-managed structures, which can offer different options for who runs the business day to day.

Things to consider before forming an LLP

LLP considerations include partnership agreements, administrative requirements, and additional costs that impact your business operations.

Partnership agreement

Partnership agreements define decision-making authority and protect all partners from binding commitments made by others.

Agreement essentials:

• Partner roles: specific responsibilities and decision-making limits
• Capital contributions: cash, equipment, skills, and labor investments
• Profit sharing: distribution methods and percentages
• Liability terms: debt responsibilities and contractual obligations
• Exit strategy: buyout procedures and dissolution terms

Legal requirement: consult a qualified attorney when you create your partnership agreement so it is legally binding.

Some increased administration

LLPs have more complex tax and reporting requirements than sole proprietors. Partners also split administrative work.

Extra costs

In addition to legal costs for the LLP agreement, there are state formation and registration fees to consider. Annual partnership tax returns cost more to file than a sole proprietor tax return due to the additional reporting responsibilities.

How to start an LLP

LLP formation typically takes two to six weeks after you submit your paperwork, though requirements vary by state.

Follow these steps to establish your LLP:

1. Choose a business name

Make sure your business name is unique and complies with state naming rules and regulations. In most states, you can check with the Secretary of State's office to make sure the name is available. You may also want to check with the United States Patent and Trademark Office (USPTO) on the federal level.

2. Designate a registered agent

This is the official address to accept legal notification or government correspondence on behalf of the business.

3. Create the LLP operating agreement

Your operating agreement sets out how you manage and govern the LLP, including ownership structure, partner responsibilities, and how you share profits or losses. If your LLP will end on a set date, include that date in the agreement and in your financial statements. Use the agreement to confirm your management structure, partner rights and responsibilities, accounting procedures, and tax reporting processes.

4. File state paperwork

Required documents and licenses:

• Formation documents: Articles of Organization and Certificate of Limited Liability Partnership (names vary by state)
• Professional licenses: appropriate credentials for your industry
• Business requirements:business bank account and employer identification number (EIN)
• Insurance coverage: workers compensation and malpractice insurance (state-dependent)
• Registration fees: paid to your filing state

Local jurisdictions: Generally, you don’t need to register with county or city governments when forming your business, but you may need licenses or permits. Regulations vary greatly, so check with your local government in the locations where you operate.

Multiple states: If you do business in more than one state, you may need to file in each one. 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. Some states require obtaining a Certificate of Good Standing from the state where you filed initially.

5. Maintain compliance

LLPs generally have fewer compliance and reporting requirements than corporations, but there are still key state-level rules to follow. For example, a US Government Accountability Office (GAO) report noted that some states require some information on members during the formation of an LLC, highlighting the need to be aware of local regulations. While they may vary by state, some of these requirements can include:

• reporting and paying employment taxes
• maintaining a partnership or operating agreement at the principal office
• filing annual reports with the state
• holding formal annual partnership meetings and recording minutes
• renewing licenses and permits
• notifying the state of any significant changes to the business

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

LLP vs limited partnership

A limited partnership (LP) combines active management partners with passive investors who contribute capital but don’t manage daily operations.

LP structure:

• General partners: manage business operations with unlimited liability
• Limited partners: contribute capital only with liability limited to investment
• Investment focus: serves as passive investment vehicle
• Common uses: film production and short-term business ventures

LLP vs LP difference: LPs have passive investors, while LLPs have active professional partners.

Managing your LLP finances with confidence

Choosing the right business structure like an LLP is a big step toward protecting your personal assets and building a successful practice. Once you’re set up, the next step is to manage your finances with the same level of professionalism. Xero provides the tools you need 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 some common questions about limited liability partnerships.

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 terms, typically based on capital contributions and agreed percentages.

Who can form an LLP?

In most states, any competent adult can be a partner in an LLP. Some states restrict membership to licensed professionals offering services that require special credentials. You must register all partners with the state when you form the LLP.

How is an LLP managed?

The operating agreement sets out which partners have management and voting rights. Day-to-day decisions usually follow majority rule, while major structural changes often require unanimous approval.

The operating agreement specifies which partners hold management and voting rights. Typically, day-to-day decisions involve majority rule while structural changes require unanimous partner approval. Partners collectively decide the LLP’s strategy and policies.

Xero does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the content provided.