Choosing the right business entity is important because it affects several aspects of your business. The entity type you choose determines how you're taxed and how protected (or not) your personal assets are. It may also affect the level of ease you have in getting a business loan or investor buy-in.
An LLLP, or limited liability limited partnership, is a newer type of business entity that’s not as well known as some others. We'll help you understand what an LLLP is, how to form one and whether it's the right business structure for you.
What is an LLLP?
A limited liability limited partnership is a form of limited partnership (LP), and it mimics the liability protection of a limited liability partnership (LLP). 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.
General partners vs. limited partners
General partners manage the day-to-day operations of the business. There is always at least one general partner in an LLLP (and in an LP, too).
In contrast, limited partners are involved in a lesser capacity, usually only as investors. You can think of these as “silent” partners.
Liability protections
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 protecting both fixed and liquid assets.
See the table below for a breakdown of the liability protections across the three types of limited partnerships.
Partnership liability comparison
| LP (limited partnership) | LLLP (limited liability limited partnership) | LLP (limited liability partnership) | |
|---|---|---|---|
| Partner roles | General (active) and limited (passive). | General (active) and limited (passive). | All partners are usually active. |
| Business debts (loans, leases, etc.) | General partner: personally liable. Limited partner: protected. | General partner: protected. Limited partner: protected. | All partners: protected. |
| Partner's wrongful acts or negligence | General partner: personally liable. Limited partner: protected. | General partner: protected. Limited partner: protected. | All partners: protected. |
| Your own wrongful acts or negligence | Personally liable. | Personally liable. | Personally liable. |
| Best for | Short-term ventures, family estate planning. | Real estate, asset management. | Professional firms (lawyers, doctors, CPAs, etc.). |
LLLPs: Advantages and disadvantages
Advantages of an LLLP
The major advantage of an LLLP is the limited liability 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 and LPs can do.
Disadvantages of an LLLP
The single biggest disadvantage of an LLLP is that it’s only recognized in about 30 U.S. states. That means if you form your LLLP in a state that recognizes the structure but then do business in another state (or multiple states) where LLLPs are not recognized, general partners may be at liability risk in those states.
As a newer business structure that doesn’t hold exclusivity to shielding all owners from personal liability, an LLLP arguably doesn’t hold more appeal than a long-established structure like an LLC or S corporation. In other words, if you’re concerned about protecting all partners from a liability perspective, then you should explore a limited liability company or an S corporation or C corporation.
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 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. And well-known asset management company Edward Jones also operates under this structure.
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 your state does.
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.
Next steps
Here are a few steps to take on your way to deciding whether to establish an LLLP:
- Check that an LLLP is recognized in your state.
- Seek the advice of your small business legal and tax teams.
- Consult an online legal service to help you get the answers you need quickly.
Not convinced an LLLP is the right business structure for you after all? Take our quick quiz below to see which structure may be best for you.
