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Business Structure Series #5 (Monday, May 8, 2017)

Selecting a Business Structure Series Continued

Welcome to entry #5 of our business formation series—Selecting  a Business Structure.  Long time readers will remember that choosing a business structure that complies with your preferences is the important first step in opening a business.

 

If you will recall from Selecting a Business Structure, a Limited Liability Partnership (“LLP”) is an option available to general or limited partnerships, and a Limited Liability Limited Partnership (“LLLP”) has a different governing structure.  These two forms may register with the Texas Secretary of State in order to limit the vast liability of its general partners.

 

What is a Limited Liability Partnership?

A Limited Liability Partnership is a business formation election only available to General Partnerships and Limited Partnerships.  Registering as a Limited Liability Partnership does not create a partnership, either general or limited.  Registering as a Limited Liability Partnership instead offers liability protections to general partners.

 

This blog will address some of the distinctions between a Limited Liability Partnership  and a Limited Liability Limited Partnership.  Limited Liability Partnership means a partnership governed as a Limited Liability Partnership (LLP = GP + LLP).  Limited Liability Limited Partnership means a partnership governed as a Limited Liability Partnership  and a Limited Partnership (LLLP = LLP + LP).  These are minor but important distinctions as different parts of Texas law apply to the two different structures, as will be discussed in detail below.

 —See Definitions—Tex. Bus. Org. Code § 1.002(47)-(48)

 

What Law Applies?

Limited Liability Partnerships are controlled by Chapter 152, Subchapter J of the Texas Business Organizations Code.  Limited Liability Limited Partnerships are controlled by Chapter 153, Subchapter H of the Texas Business Organizations Code. 

—See Limited Liability Partnerships—Tex. Bus Org. Code Ch. 152, Subch. J & Limited Partnership as Limited Liability Partnership—Tex. Bus Org. Code Ch. 153, Subch. H

 

What Liability is Limited?

Unless the partnership agreement amends the applicable liability rule, a partner is not personally liable to any person, including a partner, directly or indirectly, by contribution, indemnity, or otherwise, for any obligation of the partnership incurred while the partnership is a limited liability partnership or a limited liability limited partnership.

—See Liability of Partner—Tex. Bus. Org. Code §152.801(a)

 

This means that all partners can be treated as the limited partner of a limited partnership.   If you will remember from the Limited Partnership blog, l Limited Partner is a person who has been admitted to an LP as a limited partner as provided by Chapter 153 of the Texas Business Organizations Code.

—See Definitions—Tex. Bus. Org. Code § 1.002(49)(A)

 

A limited partner is not liable for the obligations of an LP unless he is also a general partner, or in addition to the exercise of his rights and powers as a limited partner, he participates in the control of the business.  If the limited partner participates in the control of the business, he is liable only to a person who transacts business with the LP reasonably believing, based on the limited partner’s conduct, that he is a general partner.

—See Liability to Third Parties—Tex. Bus. Org. Code §153.102

 

Allowing a GP or an LP to have limited liability means that the partners are generally not liable for any business liabilities.  The business and the individual partners are considered different entities that aren’t responsible for each other’s debts. 

 

Why Choose a Limited Liability Partnership?

If you already have a General Partnership or a Limited Partnership, choosing to register it as Limited Liability would be great for all partners.  Though registration is more beneficial to general partners, the limited partners also gain extra protections that they would not otherwise have.

 

Why Should I Avoid Limited Liability Partnerships?

If you have not filed an entity with the Texas Secretary of State, there may be better forms available to you.  For example, in partnerships there are specific rules outlining what happens to the partnership if a partner is removed or inserted into the structure.  Other business formations exist without the complicated rules.

 

What Else Should I Know?

Just because your partnership is registered as limited liability does not mean that the partners can do whatever they want and avoid responsibility.  If a partner acts on his own without authority or without the approval of the other partners, that partner could be liable for his actions. Limited Liability is a shield, but it can still be penetrated.

 

Be sure to speak with your Business Law Attorney if you have concerns about registering your General Partnership as a Limited Liability Partnership or registering your Limited Partnership as a Limited Liability Partnership.

 

--Authored by Carrie A. Harris, Esq.,

 

Matthew Harris Law, PLLC  - Business Law Division

1001 Main Street, Suite 200, Lubbock, Texas, 79401-3309

Tel: (806) 702-4852 | Fax: (800) 985-9479

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