A limited liability partnership (LLP), like a limited liability company (LLC), is a legal entity that allows its owner(s) to take advantage of the business liability shield that corporations have without selling stock and actually incorporating. An LLP is different from an LLC mainly in the fact that an LLP has multiple owners. If you are planning to set up an LLP with family members, you should first take all of the pros and cons into consideration.
As is evident in their names, one main advantage of LLPs and LLCs is that they limit the extent to which their owners can be held liable for business debts. That is, if the business goes bankrupt, its owners are not usually responsible for the repayment of its debts. However, if you are directly supervising an employee when he does something that makes your company responsible for the payment of a large liability, your direct involvement could make you liable as well. If you decide to make your family members partners in an LLP rather than employees in an LLC, you are not personally responsible for any damages they may cause to another party on behalf of the company.
When your family members become partners with you in an LLP, they have a shared interest in the success of the company since they make their money by dividing the company's profits with you. This means that it will probably be easier to motivate them to work hard for the partnership's success than it would be if they were merely employees. However, since they are partners, you cannot treat them like employees. Having a share in ownership, they have the right to share in the decisions that you make as a company.
One big reason people start LLPs with family members is the trust factor. They know that they will be able to trust their family members more than they can trust employees. One problem that arises however, is the fact that, assuming a relationship of trust, LLP owners often neglect to set down their partnership agreements in writing. They often assume that they will be able to work everything out as they go. This inability to clearly define the expectations of the business relationship frequently leads to conflicts down the road. Many times the parties involved try to shirk their understood responsibilities or overstep their understood boundaries.
Though an LLP requires more paperwork and legal considerations than an LLC does, it is still much simpler than a corporation. For instance, U.S. law does not require LLP owners to conduct official yearly meetings the way it does with corporation shareholders. Also, the IRS does not "double tax" LLPs and LLCs: it taxes income on the personal level for the partners involved, and not on the company level. Even though law does not require official meetings between the owners of an LLP, it is necessary to maintain communication and include all partners in decision-making--especially when the people involved are family members who you will have to deal with for the rest of your life. This is not something that a lone LLC owner needs to worry about.