Whether you are an attorney, doctor, or other professional, you must choose a business structure for your practice. Maybe you are just starting out and wondering what type of structure is right for you. Or, perhaps your current structure is no longer working for you, and it is time for a change. Whatever the reason that led you to consider the structure for your company, there are many reasons to consider a limited liability partnership (LLP). Our Houston business attorney explains what these are.

What is an LLP?

An LLP is a company established by two or more individuals or entities, known as partners. In most cases, LLPs are formed by a group of individual professionals. For example, four attorneys may decide to form an LLP and start their own law firm. There are many different types of professionals who choose to form an LLP, including:

• Attorneys
• Doctors
• Dentists
• Architects
• Accountants

LLPs provide an alternative partnership structure to limited partnerships and general partnerships. Interestingly, Texas was the first state to create a law allowing the formation of LLPs, and approximately 40 states have now also adopted similar laws. While other states only allow LLPs for certain types of professionals, Texas law allows any group to use this business structure. This is very beneficial for many professionals, as LLPs have many advantages over other types of structures.

Limited Legal Liability

One of the biggest benefits of establishing an LLP is the balance of management control combined with limited liability exposure. As in general partnerships, LLPs allow the partners to actively participate when operating the business. Unlike general partnerships, however, LLPs provide partners with limited liability. Usually,  the partners in an LLP only risk the capital they have invested in the business. They are not at risk of being held liable for the mistakes of another partner. Still, partners in an LLP are liable for their own wrongdoing, negligence, and debt.

If a partner in an LLP fails to use reasonable care while conducting business, such as failing to supervise employees, and someone becomes hurt, that partner can be held liable for their negligence. As such, the negligent partner would be liable for personally paying damages. Under Texas law, LLPs are required to carry liability insurance.

Flexibility in Management Roles

Each partner in an LLP has the right to help manage the business. There is also a great deal of flexibility when shaping the roles of each partner in an LLP. This means that every partner has substantial freedom when determining how to manage the partnership. Partners can agree to delegate the daily operation of the business to a specific partner. They may also decide to assign specific duties based on a partner’s experience, expertise, and personal interest.

It is important to act proactively when forming an LLP to avoid confusion about the roles of different partners. A partnership agreement can outline the roles and responsibilities of each partner and create a framework in case there is ever a dispute. A Houston business attorney can draft your agreement and include all necessary provisions to protect all partners.

Relatively Easy Formation

Forming an LLP in Texas is relatively easy. Generally, partners need to only choose a name, file a Certificate of Formation, appoint a registered agent, file for registration, and obtain an EIN. While these are required steps, there are also recommended steps, such as drafting a partnership agreement. An attorney can help you through the process and make it even easier for you.

Tax Advantages

LLPs typically share the limited liability of corporations, but they also avoid the double taxation of a corporation. Instead, LLPs are treated as pass-through entities. As such, the LLP itself is not taxed as an individual entity under federal tax law. The laws allow the taxes to pass through the LLP to the individual partners who report their share of the company’s profits and losses on their individual tax returns. Owners of pass-through entities are often able to take advantage of the 20% pass-through tax deduction. Under this law, only 80 percent of your overall income is taxed rather than 100%, resulting in substantial savings.

Considerations Before Forming an LLP

While LLPs do have many advantages, there are also certain factors to consider before forming one. These are as follows:

• Different laws in different states: The laws on LLPs vary significantly from state to state. Not all states even recognize this type of business structure. As such, if your company is going to operate in multiple states, you may not be able to register in all states as an LLP. 
• Two partners are required: To form an LLP, there must be at least two partners. This means that if one partner dies, retires, or leaves the partnership for any reason, the LLP may have to be dissolved.
• Costly insurance premiums: While partners are not required to carry liability insurance, it is recommended that all parties in an LLP have this type of coverage. Without it, a partner is personally liable for paying damages in the event of wrongdoing or negligence. The cost of insurance premiums can be high. Additionally, LLPs are required to carry a minimum amount of liability insurance of $100,000. These premiums can also be quite high.

While it is important to consider the above factors, there are ways to minimize the negative implications so all partners can reap the benefits.

Our Business Attorney in Houston Can Help with Your Case

There are many different types of business structures for law firms and other professionals in Texas. At Integrity Law Group, our Houston business attorney can advise on the different types of structures, help you determine which one is right for you, and guide you through the process so you can reap all of the benefits. Call us now at (832) 280-9197 or fill out our online form to schedule a consultation with our experienced attorney and to learn more about how we can help with your case.

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