Q: Does an LLP need two partners at the moment of incorporation, or can I open the LLP initially with one partner only? Also, can I change partners later on?
Thanks to a client in Delaware for this great question! Unfortunately, you can’t form an LLP with only one partner. By law, a limited liability partnership must have two or more partners. However, you can add or remove partners as necessary by amending your partnership agreement. In this blog, we’ll go over the basics of LLP partnership requirements and how to change partners. For legal advice that is specific to your business, consult a business attorney in your jurisdiction of operation.
LLP Partnership Requirements
Legally, an LLP must have two or more partners. Section 202(a) of the Uniform Partnership Act (UPA) defines a partnership as “the association of two or more persons” working as “co-owners” of “a business for profit” (italics added). Authored in 1914 and modernized in 1997, the UPA has been adopted (with some variations) by 45 US states and jurisdictions and is a reliable source for LLP rules.
Who Can be an LLP Partner?
You may be surprised to know that, in general, both individuals and entities can serve as LLP partners.
Section 102(14) of the UPA defines the following as “persons” eligible to serve as LLP partners:
- Individuals
- Business and non-profit corporations
- Limited liability companies
- Trusts
- Estates
- Joint ventures
- Associations
- Governmental subdivisions and agencies
- Other legal and commercial entities
However, there are some exceptions. Some states limit the formation of LLPs to certain professions. For example, in California, you can only form an LLP if your business is engaged in architecture, engineering, land surveying, law, or public accountancy. If you plan on operating your business in a state with LLP restrictions, partnership may be limited to individuals and entities within specified professions.
Can an LLP Survive if a Partner Leaves or Dies?
It’s entirely possible for your partnership to survive the departure of a partner as long as:
- Your partnership has more than two partners, and losing a partner won’t leave your business with only one remaining partner.
- As a two-person partnership, you take on a new partner within 90 days of your original partner’s departure.
Section 801(6) of the UPA states that a partnership will be dissolved after “90 consecutive days in which the partnership does not have at least two partners.”
Of course, in the event that a partner leaves or passes away, you will need to follow the rules for removing them from the partnership, including amending your partnership agreement and liquidating or transferring assets. If your partner is deceased, these actions must be completed with that partner’s legal representative.
How to Change LLP Partners
Within an LLP, you can change partnership by adding and/or removing partners. Because both adding and removing a partner will require the transfer of assets, we suggest consulting a business attorney or CPA to help ensure that the process runs smoothly.
Adding a Partner
According to Section 402(b) of the UPA, to add a partner after LLP formation, you must:
- Get the consent of all existing partners (typically achieved by calling a meeting of your partners and having them vote to affirm taking on a new partner).
- Follow the procedures for adding a partner as provided in your partnership agreement, including any necessary transfers of assets and updating your partnership agreement to reflect your LLP’s updated ownership.
You can generally add as many partners as you want—the UPA doesn’t limit the number of partners you can have.
Removing a Partner
When a partner leaves an LLP, this process is called dissociation.
There are many reasons for dissociation. For example, a partner may:
- Choose to leave an LLP
- Be expelled by an LLP’s other partners
- Become ineligible to serve as partner due to bankruptcy or another disqualifying circumstance
- No longer be able to serve as partner due to death or circumstances rendering them incapable of performing their duties
The process for removing a partner is similar to adding one—you’ll need to follow the rules laid out in your partnership agreement. Depending on what your partnership agreement contains, you may or may need to get the consent of all partners to approve a dissociation.
Generally, you’ll need to:
- Review your partnership agreement. If your partnership agreement contains clear terms for dissociation (for example, in case of violation of contract), a partner can be dissociated based on the rules provided in the partnership agreement alone.
- Receive notice of or get consent for dissociation. When possible, a departing partner must provide notice of their withdrawal from the partnership. Otherwise, a partner may be removed with the consent of all other partners. (If the terms of dissociation are not provided for in your partnership agreement.)
- Follow the procedures for removing a partner as provided in your partnership agreement. This includes any necessary transfers of assets and updating your partnership agreement to reflect your LLP’s updated ownership.
You can find a more complete description of dissociation circumstances and procedures in section 601 of the UPA. Because the reasons for dissociation—voluntary and involuntary—are many, we suggest having a business lawyer assist your LLP with the partner dissociation process.
LLP FAQs
Here are some answers to frequently asked questions about LLPs.
What’s the difference between an LLP and an LLC?
There are several differences and similarities between LLPs and LLCs. The primary differences are related to management and taxation.
LLCs can be owned by a single member, but LLPs must have at least two partners. Additionally, while ownership interest can be divided unevenly between members, ownership in an LLP is typically divided evenly. LLCs may be member- or manager-managed, whereas LLPs are usually managed by the partners, who take on equal management duties.
An LLC pays taxes as a disregarded entity, a partnership, a c-corp, or an s-corp, depending on the number of members it has and how its members choose to be taxed. An LLP can only be taxed as a partnership.
Do all states allow LLPs?
No. Not all states allow LLPs, and some states place restrictions on the types of businesses that can form LLPs. Check with your Secretary of State or other agency in charge of business registration in your state to find out if you can establish an LLP where your business is located.