The IRS does not require limited liability partnerships to pay taxes on their business profits.
Limited liability partnerships, LLPs, are one of several business structures that function like general partnerships. Owners of LLPs are given priority standings in their companies while receiving liability protections against the negligent actions of their partners. LLPs are taxed just like partnerships are as well, shielding companies from paying federal income taxes on its earnings.
What are Limited Liability Partnerships
A limited liability partnership is a business structure that works like a general partnership. The first requirement to forming LLPs is it must have at least two partners. All partners have equal authorities to make business decisions. They also share evenly in the companies' profits and losses. LLPs provide each owner with limited liability protections from paying company debts, obligations or lawsuits brought against their businesses.
How are LLPs Taxed
When it comes to paying taxes, LLPs use the pass-through taxation methods similar to partnerships. The pass-through taxation method flows business' profits and losses to the partners, which allows LLPs to avoid paying federal income taxes at the company levels. Partners report their portions of earnings and losses on their individual tax forms.
Advantages and Disadvantages
LLP owners are not responsible for the actions of their partners if they are sued. For example, if one partner has a malpractice lawsuit brought against them, other partners are not liable for any judgments made against that partner. However, partners do not escape liability from lawsuits brought against them by third parties. They are also held responsible for the actions of their employees if they've witnessed or known of their partners' wrongdoings. All partners are responsible for the general obligations of their companies such as bills and other expenses.
Considerations
LLPs are more suited for professionals such as doctors, lawyers and accountants because of their liability protections. However, because of these protections, states across the country allow only certain types of businesses to operate as LLPs. In New York and California for example, LLPs can only be formed by businesses in accounting, law, architecture and engineering.
