Limited liability partnerships are business structures that exist to protect partners from the wrongful conduct of other partners. In a traditional general partnership, every general partner is responsible for the conduct of every other partner as it relates to the business. So, an innocent partner could be held personally financially liable for the misconduct of another partner.
Nature of Limited Liability Partnerships (LLPs)
Many states thought this was unfair, particularly since some partnerships—such as law firms—were becoming so large that it was impractical for every partner to keep tabs on the behavior of every other partner. (The number of lawyers that make up members of the various state legislatures probably also helped garner some sympathy for this new approach.)
And so, limited liability partnerships were created. Despite the name, limited liability partnerships are more similar to general partnerships than limited partnerships. Other than limited liability protection, LLPs and LPs hold very little in common. (There are also such things as limited liability limited partnerships, or LLLPs, which are more related to LPs than LLPs and which I will discuss in a future post.)
Limited liability partnerships are essentially general partnerships in that all partners may take an active role in the management of the partnership, but they different in that partners are not held liable for actions of the other partners, the partnership, or the partnership’s employees. Consequently, limited liability partnerships are usually utilized by professionals, such as doctors, accountants, and, of course, lawyers. (Baker Botts and Husch Blackwell are two large law firms that function as LLPs.)
It is important to note, however, that LLPs do not offer limited liability protection to general partners for their own actions.
To form a limited liability partnership, the partners must file a Qualification of Limited Liability Partnership with the Secretary of State’s office. In addition, they must also file annual reports with the Secretary of State’s office.
The IRS taxes limited liability partnerships as partnerships. They must therefore file informational tax returns with the IRS and the Arkansas Income Tax Division.
Except in those industries where partnerships work well—such as the legal, medical, and financial services industry—limited liability partnerships are generally not of much value, as the corporate and LLC structures almost always provide more flexible and practical modes of conducting business. (It would also be a very rare occurrence where a business well suited for a limited partnership would also be well suited for a limited liability partnership).
Every situation is unique, however, and so if you are preparing to start a business, I encourage you to speak with an attorney to consider your options.