Limited liability partnerships are business structures set up similar to regular partnerships. The biggest difference between a regular partnership and a limited liability partnership is that limited liability partnerships offer liability protection for owners protecting their personal assets. Accounting methods for limited liability partnerships are very much the same as methods used when accounting for regular partnerships.
A limited liability partnership (LLP) is like a limited liability company (LLC) except that it has more than one owner. An LLP is a business structure that is designed to function as a partnership, but offer protection for its owners. With an LLP, owners’ personal assets are safe from debt collectors in the event the business fails. An LLP is considered a separate entity, similar to a corporation, however an LLP does not pay corporate taxes.
An LLP is a partnership having two or more owners. All normal rules of partnerships apply to LLP’s. An LLP agreement is drawn up by an attorney, which states all rules of the partnership including percentage of profits and losses to which the owners are entitled.
The Accounting Cycle
An LLP follows the normal accounting cycle as any other business does. When transactions occur, journal entries are made to the books. Every transaction requires an entry. After all entries are made, adjusting entries take place. The adjusting entries occur to bring accounts up to date that are not accurate at the end of the period. After adjusting entries are complete, the accounting books are closed for the year.
Just before the accounting books are closed, an accountant prepares financial statements. The three statements are the Income Statement, Balance Sheet and Statement of Owner’s Equity. For an LLP, the first two statements are identical to other business structures. For an Owner’s Equity Statement with an LLP, the only difference is that this statement breaks down each owner’s investment in the business individually. It states each owner’s investment at the beginning of the period and it adjusts that balance based on investments, withdrawals, income or losses.
At the end of the year, the profit or loss of the LLP business is determined. Based on the LLP agreement, each owner receives a Form 1065, U.S. Return of Partnership Income. This is also called a K-1 form. This form states each owner’s income, credits and deductions for the business. This income or loss is recognized on the owners' individual tax returns. The business itself does not pay taxes on the profits the business makes.