Limited partnerships (LPs) and limited liability partnerships (LLPs) are both businesses with more than one owner, but unlike general partnerships, limited partnerships and limited liability partnerships offer some of their owners limited personal liability for business debts.
In limited partnerships (LPs), at least one of the owners is considered a "general" partner who makes business decisions and is personally liable for business debts. But LPs also have at least one "limited" partner who invests money in the business but has minimal control over daily business decisions and operations. The advantage for these limited partners is that they are not personally liable for business debts.
The limited liability partnership (LLP) is a similar business structure but it has no general partners. All of the owners of an LLP have limited personal liability for business debts.
In order to better understand LPs and LLPs, it's helpful to compare them to general partnerships.
In the business world, the word "partnership" usually refers to general partnerships. A general partnership is a business that has more than one owner and that has not filed papers with the state to create a specific entity such as a corporation or limited liability company (LLC). (Click here to learn more about general partnerships.)
In a general partnership:
A limited partnership has at least one general partner and at least one limited partner. The general partner has the same role as in a general partnership: controlling the company's day-to-day operations and being personally liable for business debts.
The role of limited partners, however, differs in a few ways:
Limited partners need to understand that they can become personally liable if they do not stick to their passive role. If a limited partner starts taking an active role in the business, that partner's liability can become unlimited. If a creditor can prove that a limited partner took acts that led the creditor to believe that he or she was a general partner, that partner can be held fully and personally liable for the creditor's claims.
Some states have carved out exceptions to this "active role in the business" rule. These exceptions usually allow a limited partner to vote on issues that affect the basic structure of the partnership, including the removal of general partners, terminating the partnership, amending the partnership agreement, or selling all or most of the assets of the partnership, without jeopardizing limited partner status.
Another kind of partnership, called a limited liability partnership (LLP) or sometimes called a registered limited liability partnership (RLLP), provides all of its owners with limited personal liability. LLPs are particularly well-suited to professional groups, such as lawyers and accountants. In fact, in some states LLPs are only available to professionals.
Professionals often prefer LLPs to general partnerships, corporations, or LLCs because they don't want to be personally liable for another partner's problems -- particularly those involving malpractice claims. An LLP protects each partner from debts against the partnership arising from professional malpractice lawsuits against another partner. (A partner who loses a malpractice suit for his own mistakes, however, doesn't escape liability.)
Forming a corporation to protect personal assets may be too much trouble. In addition, some states (including California) won't allow licensed professionals to form an LLC.
An LLC is similar to a limited partnership in that it provides liability protection to the owners of the business, and the owners have flexibility in deciding how the business will be managed. However, unlike limited partnerships, all of the owners of the LLC have limited liability protection. For more information, check out LLCs and Limited Liability Protection.
In addition, states typically have different formation paperwork for LLCs than for LPs. Further, while partnerships use partnership agreements to delegate rights and responsibilities, LLCs use operating agreements to outline the internal operating procedures.
To learn more about choosing between an LLC and an LLP, check out LLC vs. LLP: What Is the Difference?.
Creating a limited partnership or limited liability partnership is done at the state level. Each state has its own rules, but in general, you must pay a fee and file papers with the state, usually a "certificate of limited partnership" or "certificate of limited liability partnership." This document is similar to the articles (or certificate) filed by a corporation or an LLC and includes information about the general and limited partners. Filing fees for LPs and LLPs are similar to those for corporations and LLCs.
For more information on limited partnerships, including how to draft a limited partnership agreement, get Form a Partnership: The Complete Legal Guide, by Ralph Warner and Denis Clifford (Nolo).