Limited liability partnerships (LLPs) have been popular among professionals such as doctors, lawyers, dentists, and architects since the 1990s. These business structures offer an alternative to general partnerships (GPs) and limited partnerships (LPs). While the majority of states now legally recognize LLPs as a formal business structure, Texas was the first state in the country to enact laws allowing this type of business formation. Below, our Houston business law attorney explains this type of business structure in further detail.

What is a Limited Liability Partnership?

When two or more partners want to start a business, an LLP is one option for a business structure. Partners in an LLP can be individuals or another entity. In most cases, professionals such as accountants and attorneys form LLPs. Although some states, such as California, restrict LLP formation to professionals, any partnership can form an LLP in Texas, regardless of its occupation.

LLPs are similar to limited liability companies (LLCs), so they are often compared to each other. Each of these business structures provides owners with limited liability, pass-through taxation, and flexible management structures. However, they also have important differences, such as the extent of the owner’s liability and the governing documents for each.

Benefits of LLPs

There are many different types of business structures, but LLPs have several benefits over others. These include:

• Limited legal liability: One of the biggest benefits of forming an LLP is the balance between management control and reduced exposure to legal liability. As in a general partnership, partners in an LLP can actively participate in business operations. While general partners are not protected by limited liability, partners in an LLP are. LLP partners generally only risk the finances they invested into the company and are not personally liable for another partner’s mistakes. Still, partners in an LLP can face liability for their own negligence, debts, and wrongdoing.
• Provides flexible management roles for partners: All partners in an LLP have a right to manage the business and can shape their own role pertaining to business operations. There is a great deal of flexibility in how partnerships are managed in an LLP. Partners can designate a managing partner to oversee business operations or they can divide duties up according to experience, expertise, or personal interest.
• Relatively easy formation: Forming an LLP is relatively easy in Texas. For example, a general partnership in the Lone Star State can convert to an LLP. Forming an LLP requires you to complete a registration form and file it with the Secretary of State’s office.
• Pass-through tax relief: Under the IRS rules, LLPs share the limited liability of a corporation while also avoiding the double taxation associated with corporations. Instead, LLPs are considered pass-through entities. Although the LLP is not taxed under federal law, the partners report their share of the company’s profits and losses on their own federal tax returns and pay the applicable taxes.

Drawbacks to LLPs

LLPs have many benefits for the partners involved in the business, but they also have some drawbacks. The first of these is that there is no uniformity across all states. In fact, some states do not legally recognize the LLP structure at all. Not only can this lack of uniformity make it more difficult to understand the laws in Texas, but it may also matter significantly if you want to operate in different states. Even if you do expand into other states that recognize LLPs, such as California, you may have to comply with different sets of laws, which can make business operations very confusing.

The protection from liability is also limited, as the name of these business structures implies. You may be found liable for another partner’s debts in some cases, whereas in other case,s you are not. If you hire employees, you may also be held vicariously liable for their actions. These factors can also make this type of business formation very confusing.

How to Form an LLP in Texas

A Houston business law attorney can help you through the many steps involved in setting up an LLP. They are as follows:

• Choose a name: In Texas, the name you choose for your LLP must be unique. Decide on a name for your business and then check to determine if it is available with the Texas Secretary of State.
• Designate a registered agent: You must select a registered agent who will receive official government and legal documents on behalf of the company. The registered agent must have a physical street address in Texas.
• Complete Form 701: You must complete Form 701, the Application for Registration. Using this form, you must complete the name of the partnership, the principal office address in Texas, the federal tax ID number, and a statement of the company’s activity. You can complete a physical form and submit it to the Texas Secretary of State by mail, or you can file it online.
• Apply for an EIN: You must also apply for an employer identification number (EIN) from the IRS. Even if the LLP does not have any employees, it must still obtain an EIN because they are a separate legal entity.
• Draft a partnership agreement: You are not required to file a partnership agreement when forming an LLP. However, a written contract can outline the rights and responsibilities of each partner, outline their roles in business operations, and more. Perhaps most importantly, a written contract can outline how to resolve disputes if one arises in the future. A Houston business law attorney can draft an agreement that will offer protection to all partners.

Call Our Business Law Attorney in Houston Today

If you want to start a business and are considering an LLP, our Houston business law attorney can help. At Integrity Law Group, PLLC, our experienced attorney can review your goals for the company, advise you of the different structures available, and help you determine which one is right for your business. Call us now at (832) 384-5207 or fill out our online form to schedule a consultation and to learn more about how we can help.

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