As one of the most highly searched partnership terms online and a constant focal point of news media, the term “limited liability partnership” – and all of its variations – is one of the hottest partnership topics today. So what is all the fuss about?
I have previously discussed strategic alliances and joint ventures, and here I will delve into the world of limited liability as it pertains to partnership and company formation. There are many variations of a limited liability partnership, each with its subtle nuances and variations by country. In the interest of not being too dry, I will take a lighter approach to covering these partnerships by comparing three types: limited partnerships, limited liability partnerships and limited liability limited partnerships (along with some relatable examples and fun factoids).
So… What Exactly Is a Limited Partnership?
A limited partnership (LP) is a style of partnership that consists of one or more general partners and one or more limited partners. In this type of partnership, only one party is required to hold the general partner role typical of a conventional firm, complete with management control, joint liability for any partnership debts and rights to a portion of partnership property and profits. Limited partners, on the other hand, are more typical of corporate shareholders, as they have limited liability. Therefore limited partners retain no management authority and are only liable for the debts incurred by the firm in proportion to their investment.
In LPs, general partners will pay the limited partners a return on their investment, which is predefined in the partnership agreement. The general partners will carry more liability, particularly in the case of financial loss.
|The societates publicanorum, which arose in Rome in the third century BC, may have arguably been the earliest form of limited partnership. During the heyday of the Roman Empire, they were roughly equivalent to today’s corporations. Some had many investors, and interests were publicly tradable. However, they required at least one (and often several) partners with unlimited liability.|
How LPs Differ from a Limited Liability Partnership
A limited liability partnership (LLP) exists where some or all partners have limited liability. In an LLP, each partner is not responsible (liable) for the conduct of other partner(s) or negligence. In this instance, the partners hold a form of limited liability similar to that of shareholders in a corporation. Unlike corporate shareholders, however, partners of a limited liability partnership retain the right to manage the business directly.
Just as owners of a simple partnership hold legal responsibilities, so too do partners that take on managerial roles within an LLP. Silent partners and investors in an LLP receive liability protection as long as they do not take on a managerial role.
In some countries LLPs are distinct from LPs. If this the case, the LLP will give all partners limited liability while an LP will require at least one unlimited liability partner. Each nation has its own variation, so check with your local and federal laws to determine which kind of partnership suits you best.
Types of businesses that use LLPs:
- Professional service providers
- Law firms
- Group medical practices
|LLPs cannot have corporations as owners! Sorry, no parent companies here.|
How LPs and LLPs Differ from Limited Liability Limited Partnerships
Recognized under commercial law in the US, a limited liability limited partnership (LLLP) is a new, modified version of a limited partnership. An LLLP consists of one or more general partners, which manage the LLLP, and one or more limited partners, which generally have only a financial stake in the partnership.
A big difference between an LLLP and an LP lies in the scope of the general partners’ liability for debts and ongoing obligations to the partnership.
|Because the LLLP is so new, it is not yet being used across the country. Arkansas, Arizona, Colorado, Delaware, Florida, Georgia, Maryland, Nevada, Texas and Kentucky have all adopted statutes that allow businesses to form an LLLP, usually by converting an existing limited partnership. In this case general partners might want to enter an LLLP to reduce their legal liability.|
The Right Limited Liability Partnership for Your Business
Not ready to jump into a full-fledged partnership, with all of the risks and liabilities that may entail? Maybe a partnership that offers limited liability is the right partnership type for you.
There are so many variations of a limited liability partnership that they make an excellent fit for many who are not ready to commit to full liability within a partnership. With the flexibility available between LPs, LLPs and LLLPs and many business leaders realizing that partnerships are essential to growth, it is no surprise that limited liability partnerships are such a popular topic!
Looking to enter into a limited liability partnership? Join Powerlinx and tell us about your growth goals today.
Featured image by David Wall; edits made