Starting Limited Liability Partnerships

In many states, owners of an LLP have only a reduced form of limited liability from the claims of the business's creditors. This " limited shield ," as it is sometimes called, does not afford the owners the same protection they would enjoy in either the LLC or the corporation .

In addition, in many states, the business interests of the owners of an LLP are afforded less protection from the claims of the owners' personal creditors , as compared to the LLC.

Finally, California and New York limit the use of LLPs to professionals, thus eliminating the LLP as a choice for other business owners. (In California, the term "professionals" is defined narrowly to include only lawyers and accountants, further restricting the availability of the LLP there).

In the past, many professions were not allowed to incorporate, preventing the use of a corporate for that would limit personal liability. The LLP permits older professional partnerships to transition to limited liability status without tax consequences, and without having to incur the costs associated with the transfer assets from the old partnership to the new LLV>.

The conversion process from a general partnership to an LLP is unique in the law. The general partnership simply registers as an LLP. Technically, the old entity does not dissolve, and a new entity is not created. The old entity continues to exist, but is now subject to a new set of laws (i.e., those governing the LLP). The conversion does not trigger a taxable event because there is no change in the entity. Moreover, because of this registration process, none of the assets needs to be re-titled, making the conversion especially simple and inexpensive.

The LLC vs. the LLP. An LLP is not the same form as an LLC. Important differences generally make the LLC a better choice for the small business owner.

While all of the owners of both an LLC and an LLP have limited liability from the claims of the business's creditors, in many states the quality of the limited liability is less for an LLP. Since your business entity does not have to be created in the same state in which you reside or do business, it's best to avoid creating an LLP in one of the...