SHOULD (OR CAN) YOUR SMALL BUSINESS
BE A LIMITED LIABILITY PARTNERSHIP?

LIMITED LIABILITY PARTNERSHIPS -- THE BASICS


Copyright © 2016, Michael D. Jenkins
All Rights Reserved


All 50 states and the District of Columbia now allow some types of businesses to operate as limited liability partnerships (LLPs). Ironically, Wyoming, which was the first state to adopt an LLC law, was the last state to adopt an LLP law.

To form an LLP, it is generally not necessary to file any written articles of organization or have a written partnership agreement, or to comply with certain other formalities that are required of an LLC. Instead, you simply file an election form with a state agency (the Secretary of State in most states) and pay the applicable fees and -- Voila! -- your general partnership now has limited liability for its partners, much like the shareholders of a corporation or the members of an LLC.

In addition, where permissible, you may wish to form a limited liability limited partnership, or LLLP, a somewhat more formal entity that is now allowed in a number of states. An LLLP is simply a limited partnership that elects to become an LLP as well. The advantage of an LLLP is that the general partners obtain the limited liability protection of an LLP, so that none of the partners, general or limited, in an LLLP have any personal liability, as a rule. Limited partnerships generally need to have a limited partnership agreement that spells out the respective rights of the general partners, who manage the business, and the limited partners, who are usually passive investors and have no say in management.

As a rule, the limited partners in a limited partnership are the only partners who have limited liability protection -- the general partners are fully liable for all the debts of the partnership. In states that allow LLLPs, the limited partnership simply registers as both a limited partnership and as an LLP, thus providing the general partners with varying degrees of limited liability protection from creditors. So far, only a few states permit LLLPs, so in those states limited partnerships are often formed with a general partner that is itself a limited liability entity -- a corporation or LLC.

A few words of caution about LLPs and LLLPs are in order, however:

  • In some states, such as New York and California, the LLP laws allow only certain professional service firms to elect LLP status, although most states with LLP laws now allow any type of business general partnership to elect limited liability status (and a few states also allow limited partnerships to do so, which provides liability protection for the general partners in a limited partnership).
  • If your business is a partnership that is eligible to convert to LLP status, be sure if you do so that you don't simply adopt your existing partnership agreement as the LLPs operating agreement. For example, if your partnership agreement has provisions that require a partner with a negative partnership capital account to make up such a deficit, such a provision in your LLPs operating agreement could open a "swinging back door of liability" for partners in your LLP, defeating your primary goal of having a limited liability legal entity (although the laws in most states now protect an LLP against such an oversight). (Fortunately, most states have now changed their laws so that such provisions in a partnership agreement that existed when the partnership converted to LLP status are rendered void.)
  • In some states, you will be required to take out large liability insurance policies for negligence or other wrongful acts of the LLP or its partners, as part of the price you must pay to the benefits of limited liability. (However, several states that had such a requirement have since repealed it.)
  • In some states, the LLP law offers less liability protection than a corporation or LLC. That is, an LLP only protects you from negligence, wrongful acts or other such misconduct of the other partners, and not from your own malpractice, negligence or other misconduct or from other debts of the partnership. However, more and more states are adopting the Revised Uniform Partnership Act, which provides much better liability protection to partners in an LLP (except with regard to malpractice liability in a professional LLP).
  • Most states do not yet allow limited partnerships to become LLLPs. Therefore, it is not always clear how those states will treat an LLLP that was formed in another state or whether the general partners of such an entity will be afforded limited liability protection in a state whose law does not provide for LLLPs.
  • Finally, while it is possible to set up a corporation or LLC with a single owner, that is not possible with an LLP or any other type of partnership -- to have a partnership, you must have a partner or partners!


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This page last modified: January 1, 2016