Whether an LLLP is the right choice for you is a decision that you and your legal and tax advisors will have to make. Read on to see what you should know about LLLPs.
Understanding the Basics of LLLPs
The first step toward understanding LLLPs is knowing how limited partnerships (LPs) work. There are one or more general partners and one or more limited partners in a limited partnership. The general partners often manage the business. The limited partners are silent. 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. Savvy investors sometimes create a special limited liability company (LLC) to get around this. They name the LLC as the general partner. They then elect themselves as managers of the LLC. This move allows general partners to use the benefits of a limited partnership. They avoid personal liability for company debts. The general partner would be the limited liability company if the limited partnership were to fail. The LLC 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. This strategy achieves what it sets out to achieve, but it also has its drawbacks, such as added expenses, paperwork, and government filings. Roughly half the states in the country allow for the creation of something called a “limited liability limited partnership” to help get around the problem.
Pros and Cons of LLLPs
Unlike a traditional limited partnership, the general partner 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. It lets states avoid unnecessary paperwork. But not all states recognize LLLPs. Your eligibility will depend on where you plan to open your business. Another issue is that this is a new type of partnership, so it’s less proven in court. That means there’s less legal precedent when they’re involved in litigation, so outcomes may be less predictable.
Common Uses for LLLPs
One of the most popular uses of limited liability limited partnerships is in the real estate industry. 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 that they aren’t liable for the partnership’s debt. They can only lose what they’ve invested. The general partner has the same level of protection. Regular operating companies that are not involved in real estate can also use the LLLP structure. Anything from car dealerships to publishing firms to scientific laboratories to asset management companies can be structured as LLLPs.
