Question

ACCT1210 Chapter 12  

19.

Three types of partnerships were described in the text. Explain how limited partnerships (LP) and limited liability partnerships (LLP) differ from each other and from a traditional partnership.

Answer 1

Q.19.

  

There are three relatively common partnership types: general partnership (GP), limited partnership (LP) and limited liability partnership (LLP). A fourth, the limited liability limited partnership (LLLP), is not recognized in all states. There are often distinct reasons why business owners choose each of these partnership types, which are explained below.  

a. General partnership-

• Ease of creation. No state filing is required. The partnership is created when the partners begin business activities.
• Low cost of operation. Because general partnerships are not formed by means of a state filing, they are not required to pay a formation filing fee, ongoing state fees or franchise taxes. The partnership must still obtain the business licenses and permits required for operation however.
• Few ongoing requirements. Unlike corporations, general partnerships are not required to hold annual meetings of the owners, issue partnership interest, and keep personal asset separate from business assets. Having a partnership agreement that outlines how the partnership will be managed, the roles of each partner, and what events will cause the partnership to end operations is recommended.

b.Limited partnership-

• Unlimited liability for general partners only. In a limited partnership (LP), at least one partner has unlimited liability—the general partner(s). The other partners (limited partners) have limited liability, meaning their personal assets typically cannot be used to satisfy business debts and liabilities. The amount of their liability is limited to their investment in the LP.
• Limited partners are not involved in management. The general partners oversee the day-to-day operations of the LP. Limited partners are basically silent investors.
• Short-term projects/ventures. LPs are often the business type of choice for special situations versus true businesses. For example, films are often formalized as LPs and family estate planning often utilizes LPs.

c.Limited liability partnership-

• Professional service businesses. Limited liability partnerships (LLPs) can only be created by certain types of professional service businesses, such as accountants, attorneys, architects, dentists, doctors, and other fields treated as professionals under each state’s law.
• Personal asset protection. The personal assets of the partners in an LLP typically cannot be used to satisfy business debts and liabilities. The LLP does not shield the partners for liability for their personal acts. Put simply, the LLP cannot limit the liability of owners for their own malpractice.