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Limited Liability Partnership

Difference between a Limited Liability and a General Partnership

A limited liability partnership (LLP) differs from a general partnership in several ways, and can have significant advantages in the right situation. A general partnership allows several individuals to form a business, but it does not allow that business to be recognized as a separate entity from the individual partners. It provides no individual protection for the individual members from the actions or negligence of the other partners or the entity as a whole.

How LLPs Came into Being

Limited liability partnerships were formed after the collapse of real estate in Texas in the 1980s and the resulting drop in energy prices that led to several bank and savings and loan failures. Rather than go after the limited capital available from the banks, people attempted to sue the accountants and lawyers who worked for partnerships that advised the banks on financial and legal matters. These lawsuits would go after the individual personal assets of partnership members, regardless of guilt or innocence. In this aftermath, LLP laws were put into effect to protect individuals from the liability of the organization.

Key Advantages of an LLP

The major difference and advantage of a limited liability partnership is that it limits the individual liability of its members from the actions or negligence of the organization or other partners. It will protect the personal assets of the partners from the debt or obligations of the partnership itself; however, these protections do not protect an individual from the other partners, nor do they protect the actual negligent partner from liability.

Not every state provides for limited liability partnerships, and those that do can vary on the specific laws that govern them. There are certain tax advantages enjoyed by an LLP over a general partnership, also depending on each individual state. Generally, LLPs are set up for specific professional services such as:

  • attorneys,
  • physicians,
  • dentists,
  • engineers, and
  • accountants.

Most other types of businesses can benefit more from traditional types of organizational structures such as LLCs or corporations.

While LLPs are not advantageous for every business, they do provide a needed organizational structure and protection to certain types of industries that are not adequately served by a general partnership. They provide all the flexibility and benefits of a general partnership with the additional benefits of limiting the liability of the individual members. LLPs remain a valuable business structure for the professional services industry.