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Limited liability partnerships (LLPs) offer tax advantages in certain jurisdictions and provide partners with legal protection and the ability to actively manage the business. However, tax advantages may be nullified in areas with high personal income tax rates. LLPs do not require annual shareholder meetings but may not be recognized in all jurisdictions and can be difficult to invest in.
There are several ways that businesses can be legally organized, and each has benefits and drawbacks. Among the options available is what is known as a limited liability partnership (LLP). Others include general partnerships and corporations. Depending on the jurisdiction, a company established as an LLP may possess particular tax advantages over other alternatives. For a prospective businessman, the ins and outs of LLPs and other types of corporate organizations must be understood before deciding on the best way to organize a new business.
In essence, a limited liability company is the same as an unlimited or general partnership. In these agreements, two or more people sign an agreement to operate a business and share the profits. The difference between an LLP and an unlimited partnership is that a partner is legally responsible only for himself and not for the other partners. In a sense, this provides the best parts of owning and being a shareholder in a corporation. A partner in a limited liability company has the same protections as a shareholder, but also has the authority to actively manage and direct the business.
In most cases, the profits generated by a limited liability company are distributed among its various partners. These earnings are then taxed as personal income and not corporate net income. In states and countries with high business taxes but low personal income tax rates, this is a monetary advantage of operating as an LLP.
If the personal income tax rate is closer to equal, or even higher than the business tax rate, the tax advantage of operating in a limited liability company is nullified. At that point, it may be wiser from a tax perspective for a business to be incorporated and its profits to be subject to business taxes. There are non-tax considerations to consider, and there are other benefits to being an LLP beyond simply how earnings are treated.
An LLP does not need to participate in the type of annual shareholder meetings and other transparency measures that corporations must. They are generally considered capable of operating more quickly than a corporation, since partners can react more aggressively to situations without the red tape that can hold back a corporate entity, which must consult a Board of Directors. On the downside, not all jurisdictions recognize LLPs in any form. In other cases, they are also more difficult to invest.
Smart Asset.
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