What is the tax status of a limited liability partnership (LLP)?

A limited liability partnership (LLP) is considered a pass-through entity for tax purposes. This means that the income generated by the LLP is not taxed at the entity level. Instead, profits and losses are passed through to the individual partners, who then report this income on their personal tax returns. This structure helps avoid the double taxation that can occur with corporations, where the corporation pays taxes on its income, and shareholders pay taxes again on dividends received.

The pass-through nature of an LLP allows for more favorable tax treatment for the partners, as they can avoid corporate taxes and benefit from being taxed at their personal income tax rates. This characteristic is a significant reason why many professionals, such as lawyers and accountants, choose to operate as LLPs, as it combines liability protection with favorable tax implications.