LLP stands for Limited Liability Partnership. It is a general partnership that has filed paperwork with a state agency to put a wall between each partner’s personal assets and the partnership’s obligations. Partners still run the business together and still split profits under their agreement, but creditors of the firm, and clients harmed by another partner’s mistakes, generally cannot reach a partner’s house, savings, or other personal property to collect.
What the Structure Actually Does
Without the LLP election, a general partnership exposes every partner to unlimited personal liability for everything the business owes and everything every other partner does in the course of business. Filing for LLP status changes that one thing. The rest of the partnership stays intact: the firm is still a formal legal entity that can own property, enter contracts, and sue or be sued in its own name, and partners still share management authority.
Your financial exposure in an LLP is typically limited to whatever you have invested in the partnership. If the firm takes on debt it can’t pay, or if a co-partner commits malpractice on a matter you had nothing to do with, your personal assets are generally off limits.
What the Shield Does Not Cover
Every state’s LLP statute draws the same line in one place: you are always personally liable for your own wrongful acts. If you commit malpractice, defraud a client, or cause harm through your own negligence, the LLP structure will not protect you. The shield is designed to keep one partner’s mistakes from wiping out another partner’s retirement account. It was never designed to let a partner walk away from her own conduct.
Most states extend this carve-out to people you directly supervise. If an associate or staff member under your control causes harm, and the failure traces back to your oversight, you can be held personally liable. The partnership itself may also face liability, but supervisory responsibility follows the individual partner.
Courts can also set the shield aside entirely if the partnership is being used as a personal piggy bank rather than a legitimate business. Commingling personal and business funds, failing to maintain proper records, and undercapitalizing the partnership are the kinds of facts that lead courts to pierce the veil and hold individual partners personally responsible. The protective steps are the obvious ones: keep clean books, maintain adequate capitalization, and treat the partnership as a separate entity.
Full-Shield and Partial-Shield States
Not every state offers the same level of protection, and this distinction catches people off guard. Full-shield states protect partners from virtually all partnership obligations, whether they arise from a co-partner’s negligence, a breach of contract, or ordinary business debt. Partial-shield states only protect partners from liability stemming from another partner’s wrongful acts or negligence. In those states, partners can still be personally liable for the partnership’s regular commercial debts, like unpaid leases or vendor invoices. Most states have moved to full-shield protection, but confirming which version your state follows is one of the first things to check.
There is also an ongoing-compliance dimension to the shield. Most states require LLPs to file annual or biennial reports to stay in good standing. Missing those filings can result in administrative revocation of the LLP’s status, and partners can lose their liability protection without realizing it until a claim arrives. Some states also require LLPs to carry a minimum amount of professional liability insurance or set aside a designated fund to satisfy potential judgments, commonly in the $100,000 to $250,000 range depending on the state and profession.
How Partners Are Taxed
An LLP is a pass-through entity for federal income tax purposes. The partnership itself does not pay income tax. Each partner reports their share of the partnership’s income, deductions, and credits on their own individual tax return. The Treasury Department regulation implementing this principle states plainly that “partnerships as such are not subject to the income tax” and that “partners are liable for income tax only in their separate capacities.”1eCFR. 26 CFR 1.701-1 – Partners, Not Partnership, Subject to Tax
The partnership still has to file an informational return each taxable year reporting its gross income, allowable deductions, and the name and distributive share of each partner.2Office of the Law Revision Counsel. 26 USC 6031 – Return of Partnership Income In practice, the partnership files Form 1065 and issues a Schedule K-1 to each partner showing that partner’s share of income, losses, and credits.3Internal Revenue Service. About Form 1065, U.S. Return of Partnership Income Each partner then uses the K-1 to complete their personal return. This avoids the double taxation that hits traditional C-corporations, where profits are taxed once at the corporate level and again when distributed as dividends.4Internal Revenue Service. Forming a Corporation
Pass-through taxation is not the whole picture. Partners in an LLP generally owe self-employment tax on their distributive share of partnership income, whether or not that income is actually distributed. The Internal Revenue Code defines net earnings from self-employment to include a partner’s “distributive share (whether or not distributed) of income or loss” from a partnership trade or business.5Office of the Law Revision Counsel. 26 USC 1402 – Definitions For 2026, the self-employment tax rate is 15.3%: 12.4% for Social Security on earnings up to the wage base, plus 2.9% for Medicare on all earnings. This obligation surprises some new partners who are used to the employer-employee payroll split.
Who Uses LLPs
LLPs exist primarily because of professional service firms. Law firms were the earliest and most enthusiastic adopters, and most large and mid-size firms now operate as LLPs. The structure lets attorneys practice together, share resources and overhead, and split profits while keeping their personal exposure limited to their own client work and the people they directly supervise. Accounting firms followed the same path for the same reasons. Architecture, engineering, and medical practices also frequently use LLPs where state law permits.
Many states restrict LLP formation to licensed professionals in the first place, so whether an LLP is even available depends on what you do for a living and where you plan to operate.
PLLPs
Some states distinguish between a standard LLP and a Professional Limited Liability Partnership, or PLLP. A PLLP requires that all partners hold valid professional licenses in the relevant field. In states that do not recognize professional LLCs, professionals may be required to form a PLLP instead of a standard LLP. The liability protections work the same way; the PLLP label is a gatekeeping mechanism ensuring the entity is composed entirely of licensed practitioners. If your state requires a PLLP for your profession, forming a standard LLP may not be an option.
LLP Compared to the Alternatives
LLP vs. General Partnership
A general partnership and an LLP are structurally identical in almost every way except liability. In a general partnership, every partner is personally on the hook for the full amount of the partnership’s debts and for the wrongful acts of every other partner acting in the course of business. That exposure is unlimited and joint and several, meaning a creditor can pursue any one partner for the entire obligation. An LLP removes most or all of that personal exposure, depending on the state’s shield. Both structures use pass-through taxation and allow partners to manage the business directly.
LLP vs. LLC
Both LLPs and LLCs provide limited liability and pass-through taxation, which is why people confuse them. The practical differences matter. LLCs are available to virtually any type of business in every state, while many states restrict LLP formation to licensed professionals. LLCs offer a choice between member-managed and manager-managed structures, making them more adaptable for businesses where some owners want to be passive investors. LLPs operate under a partnership model where partners typically make decisions collectively, which suits professional firms where every partner is actively working in the business. LLCs also have more flexible profit-allocation options, since partnership income allocation rules under Subchapter K can be more complex to administer.
LLP vs. C-Corporation
A C-corporation is a separate taxpaying entity. Its profits are taxed at the corporate level at 21%, and shareholders are taxed again when those profits are distributed as dividends.4Internal Revenue Service. Forming a Corporation An LLP avoids this double taxation entirely.1eCFR. 26 CFR 1.701-1 – Partners, Not Partnership, Subject to Tax Corporations are governed by a board of directors and officers, which creates a formal management hierarchy. LLP partners participate directly in running the business without that layer of corporate governance. The trade-off is that corporations can issue stock to raise capital and have more established frameworks for bringing in outside investors, which is rarely a priority for professional service firms.