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SHOULD (OR CAN) YOUR SMALL BUSINESS
BE A LIMITED LIABILITY PARTNERSHIP?
LIMITED LIABILITY PARTNERSHIPS -- THE BASICS
Copyright © 2024, 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.
(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
recently 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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