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What is a Limited Liability Partnership (LLP)?

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QsId 137
Asked by Isaac Thuku
Category Personal Question
Title What is a Limited Liability Partnership (LLP)?
 

How to form an LLP step by step Requirements needed for form a Limited Liability Partnership How does a Limited Liability Partnership operate Advantages of a limited Liability Partnership Disadvantages of a limited Liability Partnership Businesses best suited to a Limited Liability Partnership

Tags LLp, of a limited Liability Partnership, forms of business, business types, business ownership
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Isaac Thuku

What is a Limited Liability Partnership (LLP)?

A limited liability partnership or LLP is a legal business structure whereby partners operate as in a traditional partnership but the liability of the member partners is limited. This business structure was introduced in 2001 under the Limited Liability Partnership Act 2000. LLPs are very similar to limited companies although they retain the tax benefits and operation flexibility of the traditional partnership structures.

Features of an LLP

A limited liability partnership is owned by the business partners and the minimum required members for such a business to operate is two. In a limited liability partnership, there are no shareholders or directors. Two of the LLP members should be designated members such that they take care of the additional administrative duties and ensure that the other partners take care of their responsibilities. If the designated members are less than two, then the law assumes that all the members are designated members.

LLPs are often adopted by professional firms such as medical practitioners, solicitors, architects and accountants because they would like to take advantage of the benefits that come with operating a LLP or because they cannot set up a limited company because of the restrictions that come up with setting such a business structure. However, an LLP structure can also be used by other businesses including family owned firms.

Disadvantages and Advantages of an LLP

An LLP combines the structures of both a limited company and a traditional partnership. Like a limited company, an LLP is separate from its owners thus it is a separate entity. It must provide a registered office address where its official documents can be delivered. Its legal capacity is unlimited which means it can be prosecuted for committing an unlawful act. It can enter into contracts and it’s liable for its debts. It should have statutory registers and file its accounts. It exists until it is officially terminated. According to law, an LLP has no maximum number for its members. However, a LLP is not authorized to appoint a company secretary.

An important advantage of an LLP over a partnership is that its members just like in a limited company have limited liability. This means members personal properties are not at risk in case the LLP is prosecuted of any wrong doing unless they themselves did the wrong doings or gave personal guarantees.

LLP like in a partnership allows the partners to pool resources thus lowering the cost of starting a business while increasing the capacity of the LLP to grow. They are able to share employees, office space and other resources. This reduction of costs allows the partners to get more profit from the business in contrast if they operated the business individually. Another advantage is that an LLP unlike a limited company has a flexible management structure as they partners do not need to hold general meetings or decide via a resolution.

LLP also have profit arrangements that are flexible and individual partners can agree on a flexible schedule to distribute the profits to each of the members. Unlike in limited companies where shares have the same divided for all shareholders. Yet another advantage is that an LLP has no tax liability in regards to corporation tax or capital gains tax on the taxable income. In a LLP the members are taxed like partners on their share of profits just like in a partnership. An LLP also allows the members of the partnership to bring in and also let out partners as per the agreement. This is important as the LLP can always add new partners that are important for the business growth.

Bottom Line

LLPs are preferred by professionals because they are flexible and partners are able to greatly benefit due to economies of scale as they work together and the liability of each partner is reduced in case of any wrong doings by the business or other partners

2017-08-03

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