Pros and Cons of Limited Liability Limited Partnerships

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A limited liability limited partnership (LLLP) is a legal entity that is a hybrid of other forms of incorporation. Like any complex matter of business structure and liability, an LLLP has some benefits and drawbacks. 

Whether this strategy is right for you will be a decision that you and your legal and tax advisors will have to make. Read on to see what you should know about limited liability limited partnerships.

Key Takeaways

  • In standard limited partnerships (LPs), one general partner usually assumes liability for the whole enterprise.
  • Limited liability limited partnerships (LLLPs) are relatively new, and not recognized in every state.
  • LLLPs offer a more streamlined filing process and less personal liability for the company compared to other business entities.
  • Investors commonly use LLLPs in real estate ventures to protect themselves against any future debt, should the venture fail.

Understanding the Basics of LLLPs

The first step toward understanding LLLPs is understanding limited partnerships (LPs). In a limited partnership, there are one or more general partners and one or more limited partners. The general partners typically manage the business, and the limited partners are silent.

Unfortunately, one of the major drawbacks of limited partnerships is that they require a general partner who is exposed to nearly unlimited liability for the debts of the partnership. To get around this, savvy investors sometimes create a special limited liability company (LLC) and name the LLC as the general partner. They then elect themselves as managers of the LLC.

This allows general partners to utilize the benefits of a limited partnership and avoid being on the hook personally for company debts. If the limited partnership fails, then the general partner would be the limited liability company, which would have very few assets and could easily be put into bankruptcy. The actual investors behind it would get to walk away to start a new project.

While this strategy achieves what it sets out to achieve, it also has its drawbacks, including added expenses, paperwork, and government filings. To help get around the problem, roughly half of the states in the country allow for the creation of something called a "limited liability limited partnership."

Not sure whether you're eligible for an LLLP in your area? Contact your state's Secretary of State or Business Bureau to learn more.

Pros and Cons of LLLPs

Unlike a traditional limited partnership, the general partner(s) of an LLLP is not personally responsible for the debts incurred by the partnership unless they agree to be responsible through debt covenants or other contracts. This avoids the hassle of setting up multiple entities as a workaround to the law and it lets states avoid unnecessary paperwork.

However, not all states recognize LLLPs, so your eligibility for one depends on where you plan to open your business. Another issue is that this type of partnership is relatively new and thus, less proven in court. That means there is less legal precedent when these partnerships are involved in litigation, and because of that, outcomes may be less predictable.

A limited liability limited partnership can do virtually anything a regular limited partnership, limited liability company, joint-stock company, or sole proprietor can do. This includes buying, selling, and owning property and investments.

Common Uses for LLLPs

One of the most popular uses of limited liability limited partnerships is in the real estate industry. For example, an LLLP may be formed when a group of investors gets together and builds a project such as a hotel, apartment community, or commercial building. The investors are often more satisfied knowing they are not liable for the partnership’s debt and can only lose what they invested. The general partner in this arrangement generally has the same level of protection.

Regular operating companies that are not involved in real estate can also use the limited liability limited partnership structure. Anything from car dealerships to publishing firms, scientific laboratories, and asset management companies could be structured as LLLPs.