Advantages and Disadvantages of Limited Partnerships
A limited liability limited partnership, or LLLP, is a fairly new legal entity that is 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 based upon the relevant circumstances in your life, but by painting a broad picture of how they might be used, I hope to help you become better informed.
Understanding the Basics of Limited Liability Limited Partnerships
You already learned how families that want to invest together might benefit from using a family limited partnership or family limited liability company to pool their money and gain economies of scale to take on larger and more profitable opportunities. You have also learned about the estate tax and gift tax benefits of limited partnerships and how you can form a limited partnership.
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. In the past, to get around this, savvy investors created a special limited liability company and named it as the general partner. They then elected themselves as managers of the limited liability company.
This allowed them to utilize the benefits of a limited partnership and avoid being on the hook personally for company debts. If the limited partnership failed, 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 achieved what it set out to achieve, it resulted in additional burden; added expense, 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 (or LLLP for short, sometimes called an LLP).
Unlike a traditional limited partnership (or LP), the general partner or general partners of a limited liability limited partnership are not personally responsible for the debts incurred by the partnership unless he, she, or they agree to be through debt covenants or other contracts. This avoids the hassle of setting up multiple entities as a workaround to the law and lets states avoid unnecessary paperwork.
Typically, Limited Liability Limited Partnerships Are Used Most Often in Real Estate
By far, the most popular use of limited liability limited partnerships is in the real estate industry when a group of investors get together and build 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, whereas the would-have-been general partner that organized the project gets the same peace of mind now that he is shielded.
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 actually Cable News Network LP, LLLP and is owned by Turner Broadcasting. There are car dealerships, publishing firms, scientific laboratories, and asset management companies structured as LLLPs.
In fact, a limited liability limited partnership can do virtually anything a regular limited partnership, limited liability company, joint stock corporation, or sole proprietor can do. This includes buying and selling stocks, bonds, mutual funds, U.S. savings bonds, and more.
More About Investing Through Limited Partnerships and Limited Liability Companies
For more information on this and related topics, there are two collections of relevant articles under two different guides tailored toward new investors. The first is the New Investor's Guide to Limited Partnerships. The second is the New Investor's Guide to Limited Liability Companies.
Both walk you through some of the major advantages of these types of legal structures from a risk management, tax, and accounting perspective. They can be extraordinarily powerful planning tools, help you accumulate and keep more wealth, and, at some point, pass that wealth on to your heirs or charity. Once you begin to have some real net worth on your personal balance sheet, it's definitely something worthy of further exploration.