Tag: limited liability partnership

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When & Why to Create a Limited Liability Partnership (LLP) in California

Forming the right business entity is one of the most important decisions for any new venture. For certain professional services, a Limited Liability Partnership (LLP) may be the ideal choice. Below, our Fremont business formation attorney explains what an LLP is and when to consider forming one in California.

What is a Limited Liability Partnership (LLP)?

In California, an LLP is a special type of partnership that offers personal liability protection to each partner. It combines the tax flexibility of a general partnership with the legal protections of a corporation—meaning that each partner is not personally liable for the misconduct or negligence of another partner.

However, California limits the types of businesses that can form an LLP. As of today, LLPs are restricted to certain licensed professionals – attorneys, accountants, and architects.

When to Form an LLP in California

LLPs are purpose-built for specific industries, and they offer unique advantages when used appropriately. You should consider creating an LLP if:

You are a licensed professional working with other licensed professionals: In California, LLPs are often used by law firms, accounting firms, and architectural practices.
You want partnership-style management with liability protection: LLPs allow each partner to participate in management while shielding them from personal liability for another partner’s mistakes.
You seek pass-through taxation: Like general partnerships and LLCs, LLPs are not subject to corporate income tax beyond the $800 minimum Franchise Tax (or 1.5% of net income, whichever is greater). Profits and losses pass through to each partner’s individual tax return.
You want flexibility in structure: LLPs allow you to define how profits, decision-making, and responsibilities are shared among partners.

Examples of Why LLPs Work Well for Licensed Professionals in California

LLPs are widely used by attorneys or accountants or architectural firms where there is more than one licensed professional in the company.
The licensed professionals seek to operate with colleagues under a shared name while maintaining personal liability protection from the other partners’ liability
Licensed professionals often use LLPs for their tax benefits
LLPs similar to partnerships can define clear division of responsibilities, percentage ownership, and the percentage of sharing of the profits and losses among the partners

Is an LLP Right for You? Ask a Business Formation Lawyer

Because LLPs are only available to certain professions in California, it’s important to confirm your eligibility and evaluate whether this structure aligns with your goals. The right legal counsel can help ensure your partnership is properly registered and legally compliant.

Contact Our California Business Attorney for LLPs Today

Lynnette Ariathurai is a trusted California business formation lawyer. If you are considering an LLP or have questions about which business entity is best for your professional practice, we are here to help. Contact our Fremont office today for a confidential consultation. We serve professionals and firms throughout the Bay Area.

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LLPs vs Professional Corporations

All businesses need the proper legal structure to thrive. For certain professionals that operate a business with more than one owner—attorneys, accountants, and architects—there are two options available: A limited liability partnership (LLP) or a professional corporation (PC). There are advantages and disadvantages to each of these entities. In this article, our Fremont business formation lawyer explains the key things to know about LLPs and PCs in California.

An Overview of LLPs and Professional Corporations

As a starting point, it is useful to have a basic understanding of the two types of professional business structures. Here is a brief overview of these business entities:

Professional corporation (PC): Governed by California’s Moscone-Knox Professional Corporation Act, a PC is a specialized type of business entity that is registered for certain businesses that offer professional services.
Limited liability partnership (LLP): As explained by the California Franchise Tax Board, an LLP is a type of partnership business that allows certain eligible professionals to access many of the benefits—liability protection, pass through taxation, etc.—offered by an LLC.

A Limited Number of Professionals Can Choose Between the Two Options

Not all licensed professionals in California have the option to choose between an LLP and a PC. In fact, you are only allowed to set up your business as an LLP if you are one of the following professions:

Licensed attorneys
Accountants
Architects

California law holds that other professionals are not eligible to operate their business as an LLP. In other words, medical doctors, physicians’ assistants, chiropractors, clinical social workers, dentists, nurses, optometrists, veterinarians, physical therapists, pharmacists, marriage, family and child counselors, and court reporters must operate as a PC.

LLPs Offer Additional Flexibility in Certain Circumstances

As LLPs share many common characteristics with LLCs, they offer several potential benefits to eligible professionals. Most notably, they offer business owners additional flexibility to customize their operations. As a partner in an LLP, you have access to enhanced protection from liability for professional malpractice claims filed against one of your partners, but the license holder for the LLP remains personally liable for all malpractice of the business. This differs from a general partnership where all partners are liable for the malpractice of one partner. Therefore, adequate malpractice insurance coverage is still recommended, as is errors and omissions insurance.

Setting up a well-structured LLP is complex. It is crucial that you have a properly crafted partnership agreement that clearly lays out ownership/operational rights and responsibilities. If you are a lawyer, accountant, or architect preparing to form an LLP in the Bay Area, an experienced California partnership agreement attorney can help.

Know the Tax Differences: LLP vs. PC

In California, a PC is generally taxed as a C-corporation unless an S-corporation election has been made. LLPs in California are usually taxed as pass-through entities. A 2021 reform passed by state lawmakers (California Assembly Bill 150) created a new pass-through entity elective tax option. If you have any questions about what type of entity offers a more advantageous tax structure for your business, it is best to consult with a licensed certified public accountant (CPA).

Get Help from a Business Formation Attorney in the Bay Area

Lynnette Ariathurai is a California attorney with experience helping entrepreneurs start business. If you have any questions about LLPs vs professional corporations, we can help. Contact us today for a confidential initial consultation. With an office in Fremont, we serve communities throughout the Bay Area.

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Are LLCs the Right Entity for You?

The current economic environment is highly competitive. It is more important than ever that businesses have the right legal structure in place. An LLC might be the right entity for your California business. Indeed, there are many reasons to select an LLC as a business entity. However, an LLC is not the right business entity for every situation. In California, certain types of businesses cannot lawfully operate as an LLC. Here, our Fremont business formation lawyer highlights the key things to know if you are trying to determine if an LLC is the right entity for your company.

Know the Benefits of Forming a Limited Liability Company (LLC)

As explained by the California Franchise Tax Board, a limited liability company is a type of business entity that “blends partnership and corporate structures.” There are a number of different potential advantages to operating as an LLC, including:

Ease of set up: It is relatively easy and cost-effective to set up an LLC in California. You will have to select a name for your LLC, complete form LLC-1 and submit it to the Secretary of State and pay California’s annual LLC tax. There are minimal other requirements, including annual compliance costs.
Liability protection: Perhaps the primary benefit of an LLC is that it offers strong liability protection. As a member of an LLC in California, your personal assets can be protected from the debts and liabilities of the business. There are limited exceptions, similar to a corporation.
Flexibility: A California LLC is a fundamentally flexible business structure. You can effectively structure your company in the way you feel works best—profits, financial obligations, and voting rights can be split however you and the other members desire.

It is highly recommended that you have a professionally drafted operating agreement for your LLC. A well-crafted agreement will ensure that your rights and interests are properly protected.

California Law: Not All Businesses Can Operate as LLCs

It is important to emphasize that not every type of business can operate as an LLC in California. In fact, most licensed-businesses cannot be structured as an LLC. While there are limited exceptions, you should always consult with an experienced Bay Area business lawyer before moving forward. California law is evolving and certain CSLB, service businesses and home health care businesses can now be structured as LLCs.

For certain types of licensed professionals (lawyers, accountants, architects, etc.), an alternative type of business entity called a limited liability partnership (LLP) is an option. If you have any questions about forming an LLP, our Fremont, CA business formation lawyer can help.

LLCs are Not the Right Entity for Every Business

Even if your specific type of company can operate an LLC in California, it may still not be the best option for your needs. While LLCs offer some strong advantages—low administrative costs, liability protection, flexibility, etc.—there are also some downsides.

Most notably, an LLC operates as a pass-through entity for tax purposes. There will be a self-employment tax for LLC members. For this and other reasons, LLCs are generally not the best option for companies holding significant inventory, leasing expensive commercial space, or that have high overhead costs.

Consult With a Business Lawyer in the Bay Area

Lynnette Ariathurai is an experienced, solutions-driven business formation lawyer. If you have any questions about whether an LLC is the right entity for your business, please contact us today. We serve communities throughout the area, including Fremont, Newark, Union City, East Bay, Milpitas, San Leandro, Santa Clara, Hayward, and San Jose.

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