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What Is a Limited Liability Partnership? - Definition, Advantages & Disadvantages

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  • 0:07 Limited Liability Partnership
  • 2:42 Advantages
  • 4:34 Disadvantages
  • 5:21 Lesson Summary
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Lesson Transcript
Instructor: Ashley Dugger

Ashley is an attorney. She has taught and written various introductory law courses.

Many businesses are formed as partnerships. There are actually several different types of partnerships, including limited liability partnerships. This lesson explains the advantages and disadvantages of limited liability partnerships.

Limited Liability Partnership

Partnerships are the most common business structure for businesses that have more than one owner. Many businesses, ranging from retail stores to accounting firms, are structured as partnerships. A business partnership is a for-profit business established and run by two or more individuals. There can be any number of partners involved in the business, as long as there are at least two. A business partner is a co-owner of the business.

Most business partnerships are general partnerships, meaning that all partners have responsibility for the business and unlimited liability for the financial obligations of the business. This means that general partners share both the benefits and the detriments of the business.

However, some types of partnership allow at least one owner limited personal liability for the business' financial obligations, such as debts and court judgments. One common structure is the limited liability partnership, or LLP. A limited liability partnership is a newer form of business partnership where all of the owners have limited personal liability for the financial obligations of the business.

There are no general partners in a limited liability partnership, but an LLP is similar to a general partnership. Each limited liability partner contributes to the everyday business operations. However, each partner enjoys limited personal liability for the other partners' acts. All states allow some form of LLP, though state laws vary. Note that some states only allow LLP status for professional partnerships, like accountants, lawyers or architects. In all states, limited liability partnerships can only be formed by registering with the appropriate state office.

Let's use an example. Let's say that Ben, Bob and Brandi are all lawyers. They decide to form a law firm as partners. They each contribute $50,000 to form a limited liability partnership. They will each work at the law firm and earn money for the firm.

Advantages

The main advantage of an LLP is the limited personal liability provided to each of the partners. Generally speaking, each partner's personal liability for another partner's acts is limited to the partnership's assets. In most states, a partner can't lose more than his or her investment for something another partner does.

For example, let's say that Ben took on a big case where he defended McDoodle's Restaurant. McDoodle's was sued for serving frozen hamburger patties. A customer broke his tooth on a patty and wanted McDoodle's to pay damages for his medical bills, pain and suffering.

The evidence showed that the patty wasn't frozen and that the customer's tooth was already very loose. But Ben didn't know these things because he didn't research the case, and he slept through most of the testimony during the trial. As a result, Ben didn't present a viable defense, and McDoodle's lost the case.

McDoodle's then sued Ben's law firm for negligence and malpractice. This time McDoodle's won. The law firm was ordered to pay McDoodle's $300,000. Lucky for Bob and Brandi, they have limited personal liability for Ben's acts. Bob and Brandi can't be forced to pay more than the $50,000 amount that each put into the firm. If Bob and Brandi are each forced to pay $50,000, then Ben will be responsible for paying the other $200,000 to McDoodle's.

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