Choosing the right business entity is important for your tax implications and legal recognition in your state of operation, as well as the protection of your personal assets as a business owner. Among these types of business entities is an LLLP, or limited liability limited partnership. It’s a newer type of business entity that’s not as well known as some others — such as LP, LLC or LLP — but it’s still important to know about, especially for certain industries, such as real estate development or asset management.
Below, we’ll discuss the definition of an LLLP, its advantages and disadvantages, how to form one and also explain some key differences between other business entities.
What is an LLLP?
An LLLP — limited liability limited partnership — is a newer type of legal entity your business can choose as its legal structure. It’s a hybrid of other types of business entities, but it’s considered to be a form of an LP, or limited partnership. However, in an LLLP, both general partners and limited partners are shielded from personal liability in the case of debt or legal action against the business.
An LLLP provides its partners with comparable liability protection as within an LLP, or limited liability partnership. An LLLP requires one or more general partners and mostly comprises limited partners.
General partners vs. limited partners
Knowing the difference between general partners and limited partners is a major piece of understanding an LLLP. General partners manage the day-to-day operations of the business. There is always one or more general partners in an LLLP (and in an LP, too).
In contrast, limited partners are involved in a more limited capacity, usually only as an investor. You can think of these as “silent” partners. Depending on your type of business entity, they are afforded varying levels of limited liability protection.
Different types of business entities have different types of liability protection. This is a major factor to consider when choosing a legal entity for your new business.
For instance, certain entities provide limited liability protection against lawsuits and debts, meaning that the business partners won’t be personally responsible for the financial outcome of the litigation. This is important for asset protection, including both fixed assets as well as liquid assets.
In LLLPs, the general partner (or partners) aren’t personally responsible for the liabilities of the business, including debt. (The exception here is that there may be other paperwork, such as debt covenants, set up within the partnership that could override this — but that’s not common, and you’ll certainly know whether you’ve established one of these or similar contracts.) This liability protection is an important distinguishing factor of the setup of LLLPs. LPs, in contrast, require a general partner to take up unlimited liability for the partnership’s debts.
LLLP vs. LP
LLLPs are structured so that there isn’t any personal liability for the general partner or partners. A general partner in an LP, in contrast, has exposure to personal liability such as debts or lawsuits. In other words, when the business is sued, or if it carries debt on its balance sheet, the general partner of the LP is responsible. However, an LLLP shields the general partner from this exposure and provides asset protection.
LLLP vs. LLP
An LLP is a kind of general partnership with limited liability protection — in this kind of structure, there aren’t any limited partners. An LLLP, on the other hand, includes limited partners and offers both types of partners limited liability protection.
LLLPs: Advantages and disadvantages
Like other types of business entities, LLLPs have their own set of advantages and disadvantages.
Advantages of an LLLP
The major advantage of an LLLP is the liability limited protection for the general partner, which isn’t the case with an LP. This means that if a lawsuit is brought against the company or debts are incurred, there’s no personal responsibility involved for the general partner. And, if there is misconduct of any sort by the other general partners, the general partner not responsible for the misconduct is shielded from personal liability.
An LLLP can take actions such as buying and selling stock, mutual funds, bonds and more, in the same way that sole proprietorships, LLCs, LPs and more can do.
Disadvantages of an LLLP
Even though there are advantages from a liability standpoint, LLLPs don’t offer as much or as comprehensive protection as LLCs and corporations, such as S-corps. And, you’ll have to find out if your state even recognizes LLLPs as a viable option for establishing your business entity.
Who should form an LLLP
The most common instances of LLLPs are within the real estate industry — think groups of investors going in together to establish hotels or several commercial or residential buildings. An LLLP business entity is a good setup for projects such as these, since investors don’t want to be liable for the company’s debts and can only lose the amount of their investment.
Although LLLPs are most popular with real estate companies, there are other types of businesses that also take advantage of LLLPs. It might seem surprising, but the major media company CNN is actually set up as an LLLP. Other examples include asset management companies, car dealerships and even scientific companies such as research labs.
How to establish an LLLP
As with every type of business entity, the requirements to set up an LLLP vary from state to state. You’ll want to check in with your state’s guidelines to see what’s required from a paperwork and filing standpoint.
Another reason to check in with your state? Not every state recognizes LLLPs, so you’ll want to double-check that the jurisdiction in which you want to conduct business is among those that do recognize this business entity. For instance, LLLPs are not available in California, which is important if you’re going to start a business in California. About half of U.S. states recognize these entities.
You’ll either encounter specific guidelines from your state about how to directly set up an LLLP, or you will need to set up an LP and then file for liability for general partners, which will turn your business entity into an LLLP. There will also be a fee to set up your business entity, whether or not you file directly as an LLLP or start as an LP. This, as you might expect, will also vary from state to state.
The bottom line
Deciding whether to establish an LLLP isn’t a choice that should be made alone. Seek the advice of your small business legal and tax teams on whether it’s the right business entity, since they may have some professional insight to which you’re not privy as a new business owner. Consulting an online legal service can also help you get the answers you need quickly. Before you go forward, be sure to check that an LLLP is recognized in your state as well.
This article originally appeared on JustBusiness, a subsidiary of NerdWallet.