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What are the Tax Advantages of a Limited Liability Partnership?

By Mike Howells
Updated May 17, 2024
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There are various ways companies can be legally organized, and each has benefits and downsides. Among the available options is what is known as a limited liability partnership (LLP). Others include general partnerships and corporations. Depending on the jurisdiction, a business set up as an LLP can possess particular tax advantages over other alternatives. For a prospective businessman, the specifics of LLPs and other types of corporate organizations should be understood before deciding how best to organize a new venture.

At its core, a limited liability partnership is the same thing as an unlimited, or general partnership. In these arrangements, two or more individuals sign an agreement to operate a business and share in the profits. The difference between an LLP and an unlimited partnership is that a partner is held legally responsible only for himself and not the other partners. In a sense, this provides the best parts of both owning and being a shareholder in a corporation. A partner in a limited liability partnership has the same protections as a shareholder would but also has the authority to actively manage and direct the business.

In most cases, the profits generated by a limited liability partnership are distributed among its various partners. These profits are then taxed as personal income, and not as corporate net income. In states and countries with high business taxes but low personal income tax rates, this is a monetary advantage of operating as an LLP.

If the personal income tax rate is closer to equal, or even higher than the business tax rate, the tax advantage of operating in a limited liability partnership is nullified. At that point, it may be wiser from a taxation perspective for a business to be incorporated and have its profits instead be subject to business taxes. There are non-tax considerations that must be considered, and there are other benefits to being an LLP beyond simply how profits are treated.

An LLP does not need to engage in the kind of annual shareholder meetings and other transparency measures that corporations must. They are generally considered capable of operating more swiftly than a corporation, as partners can react more dynamically to situations without the red tape that may hold up a corporate entity, which must consult a Board of Directors. On the downside, not all jurisdictions recognizes LLPs in any form. In other cases, they are also harder to invest in.

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