A Limited Liability Limited Partnership, or “LLLP”, is a variation of the Limited Partnership. It functions much like a traditional limited partnership (LP), which has two types of ownership:
- Limited Partners: These are passive investors who don’t have management authority and enjoy limited liability.
- General Partners: Typically the managers of the partnership.
The key distinction between an LP and an LLLP lies in the liability of the General Partner. Unlike in an LP, where the General Partner has unlimited personal liability, an LLLP offers the General Partner limited liability.
Why Choose an LLLP Over LP in Real Estate?
Real estate investors often utilize LPs for holding property titles. In this setup, they become the limited partners and create an LLC (Limited Liability Company) to serve as the General Partner. This strategy ensures they avoid the unlimited liability that comes with being a general partner.
However, the LLLP provides a streamlined alternative. It naturally limits the liability of the General Partner, eliminating the need for forming a separate LLC. This makes the LLLP an attractive option, even though it’s less common in commercial real estate contexts.
How to Establish an LLLP
Initiating an LLLP requires filing a Certificate of Limited Partnership. Within this process, an election is made to classify the entity as a limited liability limited partnership. Interestingly, after the inception of the LLC Act, many have gravitated towards the straightforward nature of LLCs, preferring them over the slightly more complex and costlier LLLP structure.
LLLP vs. LLC: Breaking Down the Differences
When deciding on the ideal business structure, both LLLP and LLC emerge as viable options, especially in the realm of real estate and other investment sectors. The LLC has become the go-to choice because of its simplicity, flexibility and cost-effectiveness
Here’s a comparison to help you understand the differences between LLLPs and LLCs:
LLLP: Both General and Limited Partners have limited liability protection. This means that personal assets of partners typically aren’t at risk if the LLLP incurs debt or faces litigation.
LLC: All members of an LLC enjoy limited liability. Their personal assets are generally protected from business-related debts and lawsuits.
Complexity and Setup
LLLP: Establishing an LLLP involves filing a Certificate of Limited Partnership, followed by an election to be recognized as an LLLP. It’s a two-tiered approach that may be more complex than setting up an LLC.
LLC: The setup process is more straightforward, usually requiring only the filing of Articles of Organization or a Certificate of Incorporation with the Secretary of State’s office. This simplicity is one reason LLCs have surged in popularity.
LLLP: Features a bifurcated structure, distinguishing between Limited Partners (who are typically passive investors) and General Partners (who actively manage).
LLC: Can opt for member-managed (all members participate in daily operations) or manager-managed (specific members or external managers handle daily operations) structures.