Spiderman’s uncle once said, “With great power, comes great responsibility”. The quote is valid in the management of companies also where power and returns are directly proportional to responsibility and accountability you hold in the firm.
So before making you understand what Limited Liability Partnership is let us be more responsible and understand what is General Partnership. As books says,” General Partnership is a formal entity that is formed when two or more parties join hands”. Or to make it easy when two or more people shake hands to work and earn together it forms the partnership,
Whenever there are partnerships, the good times are enjoyed and celebrated together but at the same time the bad times makes the partner cry together. But what if you have to bear the heat of law or customer not because of your deeds but due to misdeeds of your partner. Hence, the next question is, whether there is risk associated with Partnership?
Of course, there are risks associated with partnership, one of them being of legal lawsuit. In General Partnership all the partner shares the risk of being liable for any issue that arises or created. For example, if Dhoni and Kohli are partners in milkshake venture and a bad quality results in sick stomach, they can both be held liable and sued for damages. You would want to protect yourself from this and here is concept of formal legal entity like a Limited Liability Company (LLC) comes as a savior. An LLC like, DK Milkshake, can stood up for Dhoni and Kohli as legal entity and can shield their personal assets from being part of any lawsuits.
But in some profession liability issue is more sensitive hence you need more customized and structured entity than Limited Liability Company (LLC). Hence, Limited Liability Partnership (LLP) is introduced. The LLP is formalized written partnership agreement and as per legal jurisdiction requires annual reporting. Similar to general partnership, all partners are involved in shared management and well-being of the company. At the same time, they also share liability but as per the name in LLP the sharing of liability is limited.
Profession (Lawyer, Doctor, Consulting etc.) where reputation plays a central role in business development tends to prefer LLP as the form of partnership. It helps them to pool the resources and minimize the cost involved which in return helps them to realize more profits from their activities than they could have realized individually. LLP also provide flexible partnership tree where junior partners are hired which work for the company and aspire to become senior partner with time. All the hired junior partners are professionals who are qualified and well versed with the work they are expected to perform. They are paid their salary and mostly have no liability in the company. Hence, LLP helps to scale the operations of the company in more effective and efficient way. It helps senior partners to focus on generating more business where junior partners take care of detailed work and operations.
It also offers great flexibility in terms bringing in or letting out the partners as per the outlined partnership agreement. Which in terms gives you the option of adding the potential business generating sources to the business and letting out the low performers. And limited liability provides protection to your personal assets. Hence, the liability is limited in a way that your assets in partnership are the targets of lawsuits not your personal assets but at the same time particular partner can face a lawsuit if he or she personally did something wrong.
On taxation term both LLC and LLP are flow-through entity, which means partners receives non-taxed salaries and have to pay tax on their personal income.
Hence, if are looking for flexible form of partnership which also gives you the benefits of customization, LLP is the option you can definitely look for. At the same time it is important to consult the experienced lawyer before drafting the agreement to know the legal nuance and complexities related to LLPs.
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