Limited liability partnerships, a form of modified general partnership, have gained wide acceptance due to their benefits surrounding partner liability. If fact, limited liability partnerships are an accepted form of business in many countries around the world. In the United States, limited liability partnerships have become a viable option for many professional service industries.
Limited liability partnerships are a modified version of a general partnership and aren't recognized in all states. Statutes vary from state to state, but in general, partners receive limited liability against negligent actions, misconduct and wrongful acts committed by other partners. The liability does not protect you from loss of your investment; however, your liability protects you from additional personal liability beyond your investment.
In 1991, Texas was the first state to accept limited liability partnerships. According to an addendum in the prefatory note of the Uniform Partnership Act, as of 1992, only two states had accepted the limited liability partnership as a modified general partnership. The limited legal exposure for investors and professionals caused the entity type to rapidly gain popularity. By 1996, more than 40 states were allowing formation of limited liability partnerships.
Investors require higher returns for larger risks. The limited liability partnership structure removes excessive legal risk from other partners, which some investors consider to be a deal breaker. Partnerships that previously had difficulty acquiring investor capital can now obtain investors seeking lower-risk ownership opportunities.
Venture capital firms represent an example where capital is continually necessary, but investors also need limited liability due to the large capital outlay and investments in the operation of such a company.
Professional services firms owned by and employing accountants and attorneys are another example of a business that benefits from using a limited liability partnership. The liability acquired with a 1 percent investment in McGladrey & Pullen LLP, one of the largest accounting firms in the country, limits your exposure to the amount you invest.
Most states allow any business to form a limited liability partnership; however, some states only allow approved professional service industries to form them. Check with your state before forming your limited liability partnership to determine if your business qualifies. Tax treatment of your limited liability partnership is not limited to partnership filing. Limited liability partnerships file federal taxes as a partnership by Internal Revenue Service default filing status. Use IRS Form 8832 for alternate elections of tax treatment.
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