Advantages and Disadvantages of LLP is one of the most asked questions by entrepreneurs in India. We at Wazzeer decided to help you understand you understand briefly.
Advantages of a Limited Liability Partnership
As Many Owners As Needed One of the greatest things of a limited liability partnership is that there is no limit on a number of owners that can be involved with the business. This is great because it evenly spreads out the amount of liability that each partner can have if something were to go wrong with the business.
Much Less Liability Just as the name suggests, limited liability partnerships limit your liability. Since there are multiple owners involved in the business all of the risks of the business are spread out and made much smaller than if a single person was responsible for the business on their own. This generally refers to legal issues, like if the company was sued for any reason.
Tax Benefits Another one of the great benefits of operating underneath an LLP is how you file taxes. The partnership itself doesn?t have to file taxes as a business, which provides great breaks for the company. However, each individual partner must file a variety of different tax forms regarding the business.
Great Flexibility Flexibility is a defining characteristic of limited liability partnerships. Each partner in the business has the ability to decide how much they want to contribute and how much of a partner they truly want to be in the business. They are also not obligated to participate in business meetings or consultations with anyone that they do not feel the need to.
In general partnerships, each participant is personally responsible for the actions of the company. This includes debts, liabilities and the wrongful acts of other partners. One advantage of a limited liability partnership is the liability protection it affords. This type of partnership structure protects individual partners ?from personal liability for negligent acts of other partners or employees not under their direct control,? states the SBA. In addition, individual partners are not personally responsible for company debts or other obligations. This is advantageous for an individual partner when potential lawsuits or claims of negligence against the business are concerned.
Individuals in a partnership are normally liable for filing personal income taxes, self-employment taxes and estimated taxes for themselves, according to the Internal Revenue Service. The partnership itself is not responsible for paying taxes. The credits and deductions of the company are passed through to partners to file
their individual tax returns. Credits and deductions are divided by the percentage of individual interest each partner has in the company. This can be beneficial for partners who have a limited interest in the company or special tax requirements due to their interests in other businesses.
Limited liability partnerships offer participants flexibility in business ownership. Partners have the authority to decide how they will individually contribute to business operations. Managerial duties can be divided equally or separated based on the experience of each partner. In addition, partners who have a financial interest in the company can elect to not have any authority over business decisions but still maintain ownership rights based on their percentage interest in the company. Flexibility in business operations can become a disadvantage when partners make decisions based on personal interests and not the interest of the partnership as a whole.
Disadvantages of a Limited Liability Partnership
Not All States Are On Board Due to the tax benefits and tricky workings of an LLP, some states do not allow them to form or operate in their region. Another big problem is that many states do not recognize LLP?s as a legal business.
Additional Taxes Just like some states do not recognize, the majority of the rest pose large tax limits on limited liability partnerships. These taxes can come in as additional taxes when registering as well as issues with personal tax filing.
Less Business Credibility Another huge problem with limited liability partnerships is the fact that other businesses and many consumers or clients do not see them as a credible business. Corporations gain much more respect and are generally more successful than LLPs.
Because of the special structure of limited liability partnerships, taxing authorities in some states recognize the structure as non-partnership
for tax purposes. This could possibly be a disadvantage for partners who require special tax consideration. In addition, unlike general partnerships, limited liability partnerships are not recognized as legal business structures in every state. Some states limit the creation of a limited liability partnership to professionals such as doctors or lawyers. Another disadvantage is that individual partners are not obligated to consult with other participants in certain business agreements. For the protection of the overall integrity of the company, you should create a partnership agreement that specifically outlines what each limited partner can and cannot do when making business decisions.
Important Facts About Limited Liability Partnerships
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The person who is responsible for handling taxes can be held personally responsible for any unpaid taxes from the business.
- Each partner has a duty of care position in the business. If something were to happen in their area, they are held personally and legally responsible.
In order to set up an LLP, each partner must set up a limited liability partnership agreement and register it in their state.
In Canada, only lawyers and accountants are permitted to operate underneath a limited liability partnership.
The first LLP in Japan was permitted in 2006.
The United States is the only country to allow each state to determine their own laws on the forming of LLPs