LLLP Vs. LLC

If you are starting a business and want to limit your personal liability, forming a business entity can be a smart move. Two entities that allow for multiple owners are the LLLP and the LLC. Both offer some of the same benefits, but one of them cannot be formed in all states.

At least one general partner and at least one limited partner comprise the structure of a limited partnership. A general partner participates in the management and day-to-day operations of the business. This leaves him open to personal liability, because his liability for the debts incurred by the business or the wrongs committed by the business is unlimited.

Conversely, a limited partner traditionally does not participate in the management or day-to-day operations of the business but contributes capital to the business. Because the limited partner does not participate in the running of the business, he generally bears only limited liability for the debts incurred by the business and the wrongs committed by the business. The limited partner can forfeit his liability protection by participating in the running of the business.

LLLP is shorthand for limited liability limited partnership. It is essentially a limited partnership that affords all of its owners limited liability.

Read More: Advantages & Disadvantages of a Limited Liability Company

For both the general partner and the limited partner to avoid personal liability, the limited partnership can register with its state government to become an LLLP. This limits the liability of its owners to their contributions to the business. The profits of an LLLP pass through the partnership to the individual partners, and these partners report the profits on their personal income tax forms, so the government taxes these profits only once. Fewer than half of the states recognize the LLLP, however, and that may be a problem if a business owner wants to conduct interstate commerce.

Unlike in an LLLP that requires at least two partners, one person can own a limited liability company. When two or more people own an LLC, they are called members rather than partners. All LLC members can participate in the day-to-day operations of the LLC, unlike the owners of an LLLP. As with an LLLP, all members of an LLC enjoy limited liability; they do not stand to lose personal assets for debts the business incurs or wrongs the business commits. The liability protection and the tax treatment of the LLC make it an attractive option for small business owners. The LLC is treated like a partnership for tax purposes, which means the profits flow through to the LLC to the members. Members report their profits on their personal income taxes, and the government only taxes these profits once.