Unlike a general partnership, an LLP may be subject to state franchise tax. Most commonly, you need to file documents with the appropriate state authority and pay the associated filing fee. The filing documents usually require some basic information, such as the name and address of the business, its agent for service of process and the nature of the business.
Many states also require an annual report with updated information to be filed with the state. There are pros and cons of starting a limited partnership or limited liability partnership. Some of the pros are, first and most importantly, limited liability for the limited partners in an LP.
These partners can contribute the capital in a partnership without risking their personal assets. In an LLP, the liability is limited only for partners who did not participate in creating the problem or the debt. Double taxation happens in corporations because the corporation pays income taxes on its profits, and then uses the remaining profits to pay dividends to shareholders, who again pay their own individual income tax on it. Thus, the same profit gets taxed twice.
However, with partnerships, the partners themselves are taxed on their personal income tax returns for their share of ownership in the partnership, which usually amounts to less taxation. First of all, there is no limited liability for the general partner in an LP. There is also no limited liability for the partners in an LLP who participate actively in management and take big business risks. For either the general partner in an LP, or the risk-taking partner in an LLP, creditors can reach their personal assets.
Second, the shares in a partnership cannot be publicly traded on the stock market. Publicly trading shares on the stock market is how most big companies go from small companies to large companies. Finally, if limited partners in an LP try to become active in the business they risk being seen by the law as general partners, in which case, they too risk personal liability.
Limited partnerships were popular during the s and s. Today, many business owners form limited partnerships for films and other projects that will last for a short period of time. Limited liability partnerships are relatively new in comparison to limited partnerships. LLPs became popular in the s, around the same time that limited liability companies became a popular formation choice among business owners.
In a limited partnership, the general partner is responsible for managing the company's day-to-day activities. The limited partner in a limited partnership does not participate in making managerial decisions for the business. In a limited partnership, the limited partner is more like a silent partner that has invested in the company. In a limited liability partnership, all partners of the company are allowed to make management decisions for the company.
In addition, general partners of a limited partnership may be limited liability companies or corporations, whereas LLCs and corporations may not be partners in an LLP. Like many businesses, limited partnerships can be formed by registering with the state and paying a filing fee. In addition to this, a partnership agreement shall be made between the partners stating all the responsibilities of the partners.
The partnership agreement shall also include how the profit of the partnership shall be divided among the partners. Every partnership form of the business suffers from the problem of unlimited liability, their liabilities extend right up to their personal assets, which makes regular partnership undesirable for many entrepreneurs.
This problem can be solved by Limited Liability Partnerships. Except for the status of the same legal entity and unlimited liability of partners an LLP has all the basic features of a regular partnership firm. A Limited Liability Partnership provides its owners with limited personal liability. These types of partnerships are best suited for professional groups, like lawyers and accountants, in some states LLPs are only available for professionals.
An LLP protects from the debts against the partnership arising out of malpractice lawsuits against another partner. In this agreement, the rights, liabilities, duties, and powers of all the partners are mentioned.
Limited liability partnerships are considered as a separate legal entity, which means they can own assets and incur liability on their names. In a limited liability partnership, the liability of partners is separate and limited.
In case of limited liability partnership is winding up or suffering certain legal consequences for repayment of the debt, the personal assets of the partners will not be liable to attachment. All the profits generated from the business are shared between the partners of a limited liability partnership in the same way it is shared between partners of regular firms. However, they are free to decide the ratio in which they will share profits. Partners of a limited liability partnership can be anyone, it can be either natural persons, i.
If an individual is of unsound mind or insolvent he cannot be a partner of LLP. The minimum number of partners that LLPs must have at all times is two, the maximum number of the partners is unlimited. If the requirement of the minimum number of partners is not maintained and a sole partner carries on the business, then his liability towards the firm will become unlimited.
Partnership at will means a partnership in which no clause regarding the expiration of partnership is mentioned. According to Section 7 of the Indian Partnership Act , a firm has to fulfill the following conditions to become a Partnership at will:. If in a partnership agreement the duration and determination are mentioned then it is not a partnership at will.
However, if an expiration date is fixed by the firm, but the operation of the firm continues beyond the mentioned date then it will be considered as a partnership at will. The presence of outstanding debts in a partnership at will does not mean that the partnership cannot be dissolved by the parties prior to the debt being paid, the debts can be resolved after the dissolution.
The same principle will apply on land on lease for a fixed period of time, the lease will not act as an agreement that the partnership will continue till the time as set forth in the lease. If a partnership at will is formed for the purpose of carrying out a single or particular venture, it will not be dissolved when the venture has been completed in the absence of a contract. A provision for retirement can be included in partnership at will.
A partnership at will does not prevent any of the partners to enter into another partnership for a single adventure or undertaking with another party. One single adventure or undertaking does not mean that it is a short-term event. Formation of LP can be done with one person as the general partner, whereas for the formation of LLP there should be at least two persons as a general partner.
In an LP there are two types of owners i. General partners and limited partners, there can be one or more general partners or one or more limited partners. The day to day activities and business decisions are taken by General partners in an LP. Limited partners are basically investors in a business who contribute to capital and in return get a share in the profit of the business. Whereas in an LLP there is only one type of owner i. General partners, they are the ones who contribute money, assets, or time in the business.
In an LLP all the partners are involved in business decisions and operations and also share profits or losses. All the states have different laws governing limited partnerships. In states in which LLPs are allowed they have their own governing laws. By signing a limited partnership agreement an LP is formed. In this agreement the name of the partnership, the name of the general and limited partners, the contribution of each partner, how profits will be distributed, and how new partners may be admitted are mentioned.
In case if there are one or more general partners, there shall be an additional agreement between the general partners. Whereas, for the formation of an LLP a limited liability partnership agreement has to be signed by all the partners. Except for the provision relating to limited partners, a Limited Liability Partnership agreement is similar to the agreement of a Limited partnership.
For business owners, their primary concern is their personal liability for the debts of the business, including those from lawsuits.
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