Have you ever come across the abbreviation LLLP and wondered what it stands for? Many people are unfamiliar with this acronym. But understanding its meaning can be helpful in various situations. In this article, we’ll explain the definition of LLLP and provide tips on when to use it.
What is an LLLP?
An LLLP, or Limited Liability Limited Partnership, is a partnership agreement between two or more partners. It limits their personal liability for the debts and liabilities they acquire while operating the business. With a general partnership, all partners are jointly and severally liable for the debts and obligations of the business. However, an LLLP helps protect individual partners from assuming such risk. Also, in most cases, filing taxes depends on the structure of the partnership–which will be outlined in the LLLP agreement.
Comparison of General Partners vs. Limited Partners
In a general partnership, all partners are actively involved in the business operations. As a result, they bear joint and several liability for the company’s debts, obligations, and liabilities. On the other hand, limited partners in an LLLP normally have no active role in management of the business. They also have little to no control over its operations. As a result, limited partners do not generally face personal liability as long as they remain passive investors in the business.
A General Partner of a Limited Partnership Normally Has Personal Liability for the Company’s Debts and Liabilities.
General partners of an limited partnership have unlimited personal liability. In other words, the limited partnership’s creditors can have a court hold a general partner liable for any debts and obligations of the company. On the other hand, limited partners are normally not liable for partnership obligations.
Limited Partnership vs. LLC
Both LLLPs and LLCs provide limited personal liability for all owners in the entity. An LLC, on the other hand, typically does not allow for the traditional “limited partner” arrangement. It is possible to create an LLC with managing and non-managing membership interests. But you would need to specifically do that within the LLC’s operating agreement.
Typically, with an LLC, all owners (which can include individuals and entities) will be treated as “members” of the business. As a result, all could face some level of personal liability for their actions within the business.
Advantages of LLLP.
An LLLP provides members with the additional protection that comes from a limited partnership structure. Business owners often favor this asset protection; they don’t want their personal finances impacted if the business fails. The limitation on the liability of each partner helps to ensure that if one partner is sued, the other partners can continue to operate without being held responsible for the actions of their counterpart. Additionally, because of this structure separating partners’ liabilities, investors may be more willing to invest in an LLLP than in a traditional LLC.
Also, and this is HUGE, an LLLP has more than one partner. As a result, in a state (like Arizona) that has charging order protection, a partner’s personal creditors will not be able to access their ownership interest in the LLLP. Single-member LLCs do not have this protection.
Disadvantages of LLLP.
The main disadvantage of an LLLP over just a limited partnership is that you may need to file annual reports to the state Secretary of State. That’s the case here in Arizona, for instance. However, an Arizona LLC does not require annual reports.
Tips on Making the Most of an LLLP Structure.
One of the most important decisions you can make when forming an LLLP is selecting the state to form it in. Depending on which state you choose, you may find it offers more privacy protections for your business. Additionally, you should carefully decide how many partners will form the LLLP and craft a comprehensive partnership agreement that outlines each partner’s duties, breaking down authority and distributing assets as determined by the members.
Arizona offers charging order protection for LLLP partners. Not all states provide that. This is critical, since your personal creditors won’t be able to get your ownership interest in the LLLP.