Partnerships are the most common type of business structure for businesses with more than one owner. Many businesses, ranging from retail to accounting firms, are structured as partnerships. Partnerships can be of two forms, a general partnership or a limited liability partnership (LLP). This article will explore in detail all aspects of a limited liability partnership.
The Basics of a Limited Liability Partnership
A limited liability partnership is a form of business partnership where all owners have limited personal liability for the financial obligations of the business. This is unlike general partnerships where all partners have responsibility for the business and unlimited liability for the financial obligations of the business.
A LLP must consist of one or more general partners, with unlimited liability, and one or more limited partners. Furthermore, the limited partner is only liable for the amount of money that has been contributed to the partnership. This is on record in the register, which the NSW Fair Trading maintain. It is important to note, that a partner can be an individual or a legal entity, such as a company. Additionally, the formation of a LLP is through the signing of a partnership agreement.
Operations
In a LLP, the general partners are in charge of managing the business. This includes having the ability to enter binding agreements on behalf of the partnership as their liability is unlimited. To contrast, the limited partners have a more passive role. This means they cannot engage in any business management. This is because their liability for the business’s debts and obligations is limited in proportion to the amount that they have contributed to the partnership. Therefore, limited partners must not enter any contracts on behalf of the partnership.
Advantages
A LLP has many advantages, these include:
- Firstly, having multiple business partners spreads the risk amongst partners.
- Limited liability ensures that if the partnership fails, creditors cannot go after a partner’s personal assets or income.
- Raising funds with a limited partnership is more flexible. The limited partners can contribute funds for the operation of the partnership in return for a share of its profits. This is an easy way for a business to raise funds.
- Limited partnerships can be beneficial to businesses needing to raise capital. Examples where a limited partnership might be suitable include industrial or real estate developments, agricultural schemes, mining projects or other small businesses needing to raise funds in a relatively straight forward way.
Disadvantages
- Public disclosure is the main disadvantage of an LLP. Partners must submit financial accounts for the public record. The accounts may declare income of the members which they may not wish to be made public.
- An LLP must have at least two members. The partnership may have to dissolve if one member chooses to leave or passes away.
- Extensive documentation required
- Partners liable for each others’ actions
In conclusion, a LLP is a common business structure with both advantages and disadvantages. If you have any further questions, contact a business lawyer today.
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