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What to Know about a Limited Liability Partnership
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What to Know about a Limited Liability Partnership


By Brett Melson Monday, February 27, 2017

A limited liability partnership is a general partnership which has elected to be treated as a limited liability partnership under Delaware law (an "LLP").  Unlike a limited partnership, an LLP is not set forth in a separate portion of the Delaware code; instead, the laws governing the features of an LLP are the same as those governing general partnerships.

limited liability partnership

Thus LLP status is an election made by a general partnership via the Partnership Agreement, rather than a separate and distinct class of business entity.

 

The key difference between a partnership electing to be treated as an LLP and a general partnership is the treatment of individual partners for purposes of the liabilities of the partnership resulting from the conduct of other partners.

 

In an LLP, the individual partners are not liable for the debts and liabilities of the partnership as a whole; rather, they are only responsible for liabilities arising from their own conduct acting on behalf of the partnership.  In contrast, a partner in a general partnership is fully liable for the debts and obligations of the partnership.

 

In terms of management, each partner of an LLP may participate in management and act on behalf of the LLP, which may structure its management responsibilities in any manner it chooses.

 

This differs from the requirements of a limited partnership (an "LP"), the other type of partnership under Delaware law, which offers certain partners (the limited partners) protection from personal liability. In a limited partnership, limited liability is only provided to those partners who do not participate in the management or operations of the limited partnership.

 

An LLP is in many ways similar to a limited liability company (an "LLC") in that it provides its partners (called members in an LLC) with liability protection from the debt and liabilities of the partnership.  The members of an LLC may fully participate in the management of the LLC without losing liability protection (like the partners of an LLP but in contrast to the limited partners of the LP form).

 

The LLC is now the preferred business form because of its near-complete flexibility of terms and governing provisions; as a result, LLP elections are increasingly rare.  Although similar in many ways to an LLP, the LLC is seen as a more adaptable business form.

 

LLP status is most commonly used in professional organizations, such as law firms, doctors' offices and accounting firms. Some professions are not legally permitted to organize as LLCs, and so the LLP form provides a close alternative.

 

The goal of the LLP form is to permit one partner to avoid liability for the mistakes of another while being held accountable for his/her own misconduct directly. This serves a public policy function, ensuring that members of professional organizations that are frequent targets of malpractice lawsuits can conduct business without fear that another partners' mistakes will bankrupt the non-offending partner.

 

On the other hand, states have an interest in ensuring that harmed parties have a recourse against a professional committing malpractice. In many cases, LLPs will take out insurance policies to ensure that a malpractice suit against a partner does not bring down the LLP as a whole.

 

Throughout my 17 years of helping clients form Delaware entities, the Limited Liability Partnership has come up in conversations countless times; however, the structure is rarely utilized and most business owners tend to form an LLC instead.

 

More By Brett Melson

 

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