Comparison: LP and LLP

By Edward A. Haman, J.D.

Comparison: LP and LLP

By Edward A. Haman, J.D.

If you've decided to structure your business as some form of partnership, you'll want to understand the differences between a limited partnership (LP) and a limited liability partnership (LLP).

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Not all states allow LLPs, and some restrict them to certain professions (such as accountants, architects, lawyers, and engineers). To find out whether your state allows LLPs, check with your state's business regulation agency (most often the Secretary of State).

Structural Differences

An LP and an LLP have different organizational structures. An LP can be formed with one person as the general partner, but an LLP requires at least two general partners. (In this context, a "person" can be either an individual or a business entity such as a corporation, an LLC, another LP, or another LLP.)

In an LP, there are two classes of owners, called "general partners" and "limited partners." There may be one or more general partners, and one or more limited partners. General partners make business decisions and handle the day-to-day business operations. Limited partners are basically investors who contribute assets to the business and who share in the profits, but who do not participate in the decision making or business operations.

An LLP has only one class of owners: general partners, all of whom contribute money, assets, or time to the business. All are entitled to participate in business decisions and operations, and all share in profits or losses.

Formation

The law of the state where the business is formed governs the formation of LPs and LLPs. All states have laws governing limited partnerships. States that allow LLPs also have governing laws. Both LPs and LLPs need to file some type of registration document with the appropriate state agency (most often the Secretary of State). State laws typically have certain requirements as to the content of the partnership agreement, the duties of the partners, and annual reporting.

An LP is formed by all of the partners signing a limited partnership agreement. This agreement includes the name of the partnership, the names of the general and limited partners, the contribution each partner will make, how profits will be distributed, and how new partners may be admitted. If there is more than one general partner, there may be an additional agreement just between the general partners.

An LLP is formed by all of the partners signing a limited liability partnership agreement. This agreement is similar to a limited partnership agreement, except there will not be provisions relating to limited partners.

Limitation of Liability

A primary concern for business owners is their personal liability for the debts of the business, including those from lawsuits. If a business is operated as either a sole proprietorship or a general partnership, creditors of the business may go after the personal assets of the owners if the business does not have sufficient assets. In other words, the owner's home, car, personal bank accounts, and so on, may be lost to satisfy business debts and court judgments.

A corporation, a limited liability company (LLC), a limited partnership (LP), or a limited liability partnership (LLP) will offer some limitation of personal liability, which is one of the main reasons such business entities were created.

With an LP, the general partners still have personal liability. However, limited partners are not liable for business debts, including any losses the business may suffer. The limited partners only risk what they invested in the business.

An LLP offers limited liability for all of the partners. This limitation of liability applies to business debts (such as contractual obligations and claims for negligence), but does not extend to claims for certain intentional or criminal acts (such as fraud or a partner physically assaulting someone).

Raising Capital

An LP is often better than an LLP if you expect to add partners in order to raise funds to expand your business. With an LP, limited partners can be added without giving them the right to participate in business decisions. Any partners added to an LLP will have the right to participate in business decisions and operations.

A note on securities laws. State or federal securities laws may come into play if an LP offers limited partnership interests to more than 10 investors (more than 35 in some states), to the general public, or to investors in other states. These laws may require the filing of rather complicated disclosure documents.

Weighing the Pros and Cons

If you want the ability to raise funds for your business without giving investors a say in management decisions, you may want to consider an LP. In the event more capital is needed, you can add limited partners. The downside is that you (and any other general partners) will be personally liable for business debts. Also, as noted, this may not be the best choice if the addition of partners triggers the application of any state or federal securities laws.

If your primary concern is limitation of liability, an LLP will be the better choice. However, if you want to admit more partners in order to raise capital, they will have a say in management.

As with many aspects of business, choices often involve trade-offs. You'll need to weigh the options and decide which business structure best meets your needs.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.