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What does LLP actually mean?

What does LLP actually mean?

Juliet

02/08/2019

You’ve probably noticed that almost all UK, US and other law firms’ names end with LLP. You might also know that this stands for limited liability partnership. But have you ever stopped to consider what a limited liability partnership actually is?

First, it is helpful to understand that ‘partnership’ in this context means that the partners own the firm. If a law firm is a general partnership, rather than a limited liability one, then it would work in exactly the same way as a business partnership between, say, two plumbers. These two plumbers would both earn fees by doing plumbing work and would be rewarded by receiving a proportion of their shared business’s profits. They would also probably both play a role in managing the business. For example, one should ask the other before deciding to use the company’s revenues to buy a new, expensive piece of machinery.

However, if the plumbers jointly decided to take out a loan to buy a new piece of machinery, and then found that revenues weren’t high enough for them to repay this loan, the lender would be allowed to send bailiffs to the plumbers’ personal homes to seek payment. The same is not true for limited liability partnerships. As the name suggests, when partners ‘buy in’ to the partnership by investing a sum of money (a move sometimes described as becoming an equity partner), they are not risking losing more than that sum of money (as long as they act in line with the interests and purpose of the LLP).

However, the owners of corporations (which most businesses outside professional services are) also enjoy the benefits of limited liability. So, you might be wondering why most law firms opt to become LLPs instead of corporations. There are two main reasons for this:

  • First, being an LLP means that a company doesn’t have to pay corporation tax. This means that profits are taxed only once (when partners receive their share of them and are charged income tax) instead of twice (when the corporation pays corporation tax and then when individual partners pay income tax).
  • Second, being an LLP rather than a corporation makes it easier to change the number of owners. A corporation wanting to do this has to either issue more shares (causing existing ones to lose value) or persuade existing shareholders to sell their shares (which they may not wish to do). By contrast, under UK law, an LLP can gain or lose owners at any time, as long as all existing owners agree. This is especially useful for law firms because they are likely to want to promote people to the rank of partner.