What Is a Limited Liability Partnership Agreement?
A limited liability partnership (LLP) agreement outlines each partner’s financial and legal responsibility. This agreement is often used for doctors, lawyers, and accountants. Since these professions face a higher risk of malpractice or negligence claims, limited liability protects individuals.
While an LLP requires at least two partners, the division of profits, debts, and duties remains flexible. Generally, this agreement holds each partner liable only for the amount they contribute or their own conduct.
Legal Templates offers a free limited liability partnership agreement template so you can define each partner’s role. Use our customizable form to develop an arrangement that works for everyone involved.
How to Write a Limited Liability Partnership Agreement
When writing an LLP agreement, it’s important to consider and negotiate terms for every scenario. Create an effective limited liability partnership agreement using the following steps and information:
- Record partnership details: Add the name of the partnership, the state in which it was established, and the beginning and end dates. Also, include the primary purpose of the partnership.
- List the partners: Include every partner’s full legal name and address. Determine whether to allow new partners to join later.
- Outline capital contributions: Record the due date for each partner’s financial contributions. Ensure you enter the amount and type of payment for each individual, as this amount determines their liability.
- Divide profits and losses: Divide profits and losses among partners. In a limited liability partnership, the division of losses depends on the amount invested and the agreed-upon terms. In addition, it’s common for partners in an LLP to receive a salary rather than profit payouts.
- Sort out financial matters: Figure out how the partnership will handle finances. Note the start and end of the fiscal year and establish a partnership bank account. Outline who will make interest payments and handle the bookkeeping.
- Set terms for voluntary withdrawal: Agree on the conditions for the dissolution of the partnership or voluntary withdrawal of partners. Voluntary withdrawal includes retirement or a buyout and may require unanimous or majority consent. Keep in mind that an LLP needs at least two partners to operate.
- Determine involuntary withdrawals: Create a process for partners’ involuntary withdrawals. Involuntary withdrawals may occur through death, bankruptcy, or misconduct. If no terms are stated, you will be subject to your state’s partnership laws.
- Dissolution: Determine which events can lead to dissolution of the partnership and the procedures for winding up the business.
- Finalize the terms: Finalize the terms and verify the details such as the partnership address, agreement’s effective date, governing state, and arbitration process.
Limited Liability Partnership Agreement Sample
View our free limited liability partnership agreement sample for insight into the required data. Our customizable forms have the proper LLP agreement format and legal considerations. Use our sample to create your own; available in PDF and Word formats.
Limited Liability Partnership Legal Requirements
The structure of an LLP requires consideration of state laws and legal restrictions. When writing your agreement, look into state regulations for the following factors.
Filing and Registration
In most states, partners must file a formal registration of an LLP and include the designation “LLP” within the business name. This allows clients and outside investors to identify the limited liabilities of the partners. Having the partnership filed helps legal institutions verify the limited liability and assists with tax filing.
Following State Laws
LLP agreement terms and conditions vary from state to state, with some states restricting the types of professions that can form LLPs. In addition, state laws may mandate minimum insurance coverage for malpractice or negligence. View the table below for more information about limited liability partnership laws in each state.
| Partnership Act | States |
|---|---|
| Revised Uniform Partnership Act | Alabama, Alaska, Arizona, Arkansas, California, Colorado, Delaware, District of Columbia, Florida, Hawaii, Idaho, Illinois, Iowa, Kansas, Kentucky, Maine, Maryland, Minnesota, Mississippi, Montana, Nebraska, Nevada, New Jersey, New Mexico, North Dakota, Oklahoma, Oregon, Puerto Rico, South Dakota, Tennessee, Texas, Vermont, Virginia, Washington |
| Uniform Partnership Act | Connecticut, West Virginia, and Wyoming |
| Never Adopted a Uniform Partnership Act (refer to state laws) | Georgia (GA Code § 14-8) , Indiana (IN Code § 23-4-1), Massachusetts (MA Gen L ch 109), Michigan (MI Comp L § 449),Mississippi (MS Code § 79-13), New Hampshire (NH Rev Stat § 304-A), New York (NY Pship L), North Carolina (NC Gen Stat § 59), Ohio (Ohio Rev Code § 1776), Pennsylvania (15 PA Cons Stat § 86), Rhode Island (RI Gen L § 7-12.1), Wisconsin (WI Stat § 179) |
Appointing a Registered Agent
An LLC needs to appoint someone as a registered agent to be the main point of contact for the partnership. This agent handles legal actions, claims, insurance needs, and tax filing. One of the partners within the LLP may act as the agent, or you may appoint an outside party. The registered agent must meet the following requirements:
- Have a physical street address in the state where the partnership is registered
- Availability during business hours to receive and send documents
- Ability to promptly handle and forward official business documents
Limited Liability Partnership vs. Limited Partnership
A limited liability partnership reduces partner liability, while a limited partnership reduces partner influence. An LLP is a type of equal partnership that provides all partners with decision-making authority. In a limited partnership, anyone deemed a limited partner only contributes funding and generally has no say in the daily operations. In addition, LLPs do not require a general partner, which is necessary to form a limited partnership.
Advantages & Disadvantages of a Limited Liability Partnership Agreement
Creating a limited liability partnership agreement has its pros and cons. While limited liability sounds appealing to many, consider all aspects of the arrangement. Consider the following advantages and disadvantages of an LLP agreement to make an informed decision.
Advantages
Many professionals enjoy the protections and allowances of a limited liability partnership agreement. Some of the most prominent advantages include the following:
- Reduced liability: In a limited liability partnership, the individuals involved only face the consequences of their own actions. In other partnerships, every partner is held responsible for the conduct of others.
- Flexibility: With an LLP agreement, partners negotiate flexible terms for their liability, authority, and involvement.
- Tax advantages: LLPs generally use pass-through taxation methods, meaning the income taxes do not apply to the entity as a whole. Instead, each partner’s profits are taxed as individual income. This results in fewer tax costs and eliminates the possibility of double taxation.
- Legal protection: A legally binding agreement proves each partner’s liability limits for legal claims and disputes. It offers extra protection through reduced liability.
Disadvantages
While an LLP agreement offers many positive benefits, it also has weaknesses. Consider the disadvantages of this agreement, such as:
- Legal restrictions: In some states, only certain types of businesses qualify for limited liability partnership status. Legal restrictions and limitations require additional consideration to ensure compliance.
- Insurance costs: If your LLP requires malpractice, negligence, or liability insurance, it can be costly and adds another layer of considerations to your partnership.
- Public disclosure: An LLP must legally disclose and file public financial records.
