Partners Contribution in LLP: Everything You Need to Know
Each partners contribution in LLP depends on which partner you're considering. LLP is a limited liability partnership and has two types of partners.3 min read
Each partners contribution in LLP depends on which partner you're considering. LLP is a limited liability partnership and has two types of partners. There are limited partners and general partners and each limited liability partnership has to have at least one of each. The biggest difference between the two types of partners is in the liability that each incurs. In an LLP, general partners face unlimited liability. Limited partners, on the other hand, have the advantage of only being liable up to the amount of capital they invested in the partnership.
The Difference Between an LLP and a General Partnership
Limited liability partnerships are designed to close some of the gaps found in a general partnership. These gaps can be both business-related or legal in nature. Some businesses that are commonly formed as limited liability partnerships include:
- Big legal agencies.
- Large accounting firms.
- Medical organizations comprised of doctors and healthcare professionals.
- Venture capitalists.
- Investment funds.
While LLPs are distinguished by the type of organization they are and the limited liability of some partners, the daily operations of an LLP are exactly the same as is found in a general partnership.
Forming an LLP
LLPs are formed at the state level. To do this, you file the LLP paperwork with the Secretary of State where the business is going to be located. Not all states recognize LLPs or Registered Limited Liability Partnerships as legitimate business entity formats.
While LLPs and General Partnerships are alike in that they both require at least two partners, there are also differences. In an LLP, the general partner and limited partner can, but don't have to, be people. Other options include:
- Other partnerships.
No matter what type of entity the general partners and limited partners are in an LLP, each entity engaged in managing the LLP has to have the capacity to enter into a contract on behalf of the LLP.
Ownership and Operation of an LLP
The general partner(s) and limited partner(s) divide ownership of an LLP. Specific information about who owns what in the LLP is usually defined in the governing documents that are filed with the state when the business is formed. Ownership percentages are usually based on how much each partner invests in the business; however, without a written agreement, ownership percentages are usually equally divided.
LP or GP
The biggest difference between the general partner and the limited partner is the role each one is expected to take on in regards to managing the business. The general partner is responsible for everyday management of the business. Things like the company's long-term strategy, as well as the day-to-day tasks that have to be done to run the business, are under the lone control of the general partner. The limited partner, on the other hand, plays an inactive role. The limited partner gives all control rights to the general partner when agreeing to take on the role of limited partner.
Liability in an LLP affects each partner differently, and it has a more impactful effect on each partner than the roles they play in the daily operations of a business. The general partner is assigned both the liability and the control of the business under the law. The general partner is the one making decisions about how the firm operates and any risks that are taken with business assets. The degree of control assigned to the general partner is the reason that particular entity holds the liability for the business.
The general partner's liability is attached to his or her personal assets in addition to being attached to his or her partnership interest, and the liability of that partner is unlimited. Even though an LLP is a limited liability partnership, for the general partner, it's similar to a regular general partnership. It's the limited partner who enjoys limited liability within an LLP. As the passive member of the partnership, the limited partner is only liable up to the amount of capital he or she contributed to the LLP. The limited partner gets to protect his or her personal assets while still benefiting from being a member of the limited liability partnership.
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