Advantages and Disadvantages 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 and has some benefits and drawbacks. Whether it is right for your investment purposes will be a decision that you and your legal and tax advisors will have to make. Although LLLPs do have their advantages, a significant drawback is that LLLPs aren't recognized in all states.

Understanding the Basics

The first step to 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 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 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 limited liability company.

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 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.

Unlike a traditional limited partnership, the general partner or general partners of an LLLP are 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.

Used Most Often in Real Estate

By far, the most popular use 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 has the same level of protection.

Regular operating companies not involved in real estate can use the limited liability limited partnership structure. CNN, one of the world’s largest news sources, is Cable News Network LP, LLLP, and is owned by Turner Broadcasting. There are also car dealerships, publishing firms, scientific laboratories, and asset management companies structured as LLLPs.

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 and selling stocks, bonds, mutual funds, and U.S. savings bonds.