A German citizen looking to incorporate a company in the US has a range of legal formations from which to choose. One option is the limited liability partnership (LLP), which is especially well-suited to law offices with international outlooks and tax consultancies.

This article explains what an LLP is and how it differs from a limited liability company (LLC) and a corporation. We also discuss the German equivalent of an LLP and how you can set up an LLP in the US.

What’s in this article?

• What is an LLP in the US?
  
• What are the differences among LLPs, LLCs, and corporations?
  
• What legal formations do law offices in Germany use?
  
• What is the German equivalent of an LLP?
  
• How do you incorporate an LLP?
  
• How Stripe Atlas can help
  

What is an LLP in the US?

A limited liability partnership (LLP) is a form of partnership incorporated according to US or UK law. Similar to a limited liability company (LLC), the LLP combines the properties of a partnership with the benefits of a corporation. What makes the LLP special is its limitation of liability. In general, individual partners are only liable for their own misconduct and obligations. They are not liable for the actions of other partners. However, some differences do exist between states.

As a legal formation, LLPs are common for self-employed entities, including architecture firms, law offices, tax consultancies, and auditors. In fact, in certain US states, LLPs are explicitly reserved for freelance professions, hence their prevalence in these industries.

German individuals or companies can also set up LLPs in the US, subject to certain conditions. LLPs are most attractive for founders who want to run a business as fully equal partners. All partners can manage the business directly, and they all share in the LLP’s profits and losses proportionately. From a tax perspective, LLPs in the US are generally considered transparent companies. Earnings are taxed at the individual partner level, rather than at the company level. Partners can also be subject to tax obligations in Germany. For that reason, it is important to seek sound tax advice when setting up an LLP.

What are the differences among LLPs, LLCs, and corporations?

If you want to incorporate a company in the US, you have a range of legal formations from which to choose, including LLPs, LLCs, and classic corporations, which typically include “Inc.” or “Incorporated” in their names. The key differences among these three company types include liability governance, decision-making, and profit taxation.

LLPs limit liability to each partner’s obligations and can be managed flexibly and jointly. Earnings are taxed at the individual partner level.

Unlike LLPs, LLCs offer limitation of liability and more flexibility regarding taxation. An LLC can be treated either as a transparent partnership or, if preferred, as a corporation. It also offers freedom in terms of how the business is managed. It can be managed by the partners or by external managers. Additionally, LLCs are not limited to specific professions, making them suitable options for a wide range of business models.

A corporation is a much more formalized type of company. Specifically, a C corporation (C corp) is organized as an independent legal entity, is liable for its own obligations, and is subject to corporate income tax at the company level. In addition, dividends paid out to shareholders must be taxed at the individual level. Unlike S corporations (S corps), which are taxed as pass-through entities, C corporations face double taxation. Corporations are especially suitable for high-growth businesses in need of a large amount of capital.

What legal formations do law offices in Germany use?

In Germany, there are around 64,000 law consultancies. More than three-quarters of those trade as sole proprietorships (Einzelunternehmen). In addition, there are several other legal forms in which law firms can be organized.

The LLP is an option that lends itself to law offices with an international outlook. Small law offices with a domestic focus often merge in a civil law partnership (GbR) to create a law firm (Sozietät). In this formation, all partners are personally, unlimitedly, jointly, and severally liable for the firm’s liabilities.

Another possible legal formation is a registered partnership company (Partnergesellschaft, or PartG). In a PartG, freelance professionals bear liability with the business’s assets and their private assets. However, this liability can be regulated so the private assets of partners remain untouched if they were uninvolved in the assignment in question. A special form of this legal formation is the PartG with limited professional liability (PartG mbB). This differs from the classic PartG in that there is no personal liability.

Corporations—such as the limited liability company (GmbH) or the public limited company (AG)—are also options for law offices, especially in the case of larger law firms. Because attorneys are considered freelance professionals in Germany, setting up a corporation is permitted only if all owners and managing directors hold the corresponding professional qualifications. The benefit of a GmbH is that it limits liability to company assets, which reduces the personal risk for the individuals involved.

What is the German equivalent of an LLP?

The closest German equivalent to the LLP in the US is the PartG. Both are suited for associations of freelancers, and their members are not liable for mistakes made by their partners. The PartG goes one step further, limiting professional liability to the assets of the company.

Figures produced by the German Federal Bar Association (BRAK) show that the majority of German law offices opt for the PartG mbB. Of over 5,000 professional associations registered in Germany, around 3,300 do business as a PartG mbB.

How do you incorporate an LLP?

A German citizen looking to set up an LLP in the US should understand the applicable requirements in their preferred state, as these can differ significantly from one state to the next. However, the process for incorporating an LLP generally looks like this:

Choose a state and check company names

Start by choosing the state you want to incorporate in, and select a suitable name for the business. This name cannot already be in use or infringe on trademarks, and it must contain the designation “LLP.”

Draw up a partnership agreement

The partnership agreement contains the key bylaws governing the LLP. It defines elements such as voting rights, new partner selection, task assignment, profit distribution, and liability rules. While it does not generally have to be filed with public authorities, it is highly advisable to outline this agreement in writing.

File incorporation documents

Compile all the necessary incorporation documents. These include the partnership agreement or articles of incorporation that govern internal structures and the rights and obligations of individual partners. In addition, provide the particulars of your business and its members. File the documents with the relevant state authority—usually the Secretary of State—as a “Certificate of Limited Liability Partnership.”

Appoint a registered agent

An LLP must designate an officially appointed point of contact called a “registered agent.” This person or company receives legal documents and notices from public authorities on behalf of the LLP. The registered agent must be domiciled in the state where the LLP is registered.

Apply for an Employer Identification Number (EIN)

An LLP needs an EIN to start business. You can apply for an EIN from the US tax office free of charge. You will need an EIN to open a business account, file tax returns, hire employees, and more.

Open a business account

Once you receive the EIN, you can open a separate business account for your LLP. This can make bookkeeping easier and ensure that the LLP’s liability protection is not compromised by mixing it with personal finances.

Check professional registrations and visas

Check whether you hold the professional registration required to practice your profession in your particular state. If you are working in the US from Germany or if you travel to the country for the incorporation, you will also need an appropriate visa.

Clarify taxation in Germany

An LLP connected to Germany can introduce a number of questions regarding taxes: Will the LLP be treated as a corporation in Germany or as a partnership? Will the company also be permanently established in Germany? Are there double taxation treaties? It’s important to clarify these issues with a tax advisor ahead of time to avoid liability risks and negative tax effects.

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