A principal owner is someone who makes decisions regarding the day-to-day activities of a business. In a general partnership and a limited liability partnership, or LLP, every partner is a principal partner. It is only in a limited partnership, or LP, that not every partner is a principal partner since limited partners, also known as "silent partners," do not guide the business in exchange for limited protection from personal liability resulting from the company's debts.
Every partner in a limited liability partnership is considered a principal owner, even though they receive limited protection from personal liability relating to business debts.
Limited Liability Partnership (LLP) Meaning
A limited liability partnership, also sometimes called a registered limited liability partnership, or RLLP, is a business with more than one owner, all of whom have limited personal liability for business debts. In a LLP, each partner is a principal owner, meaning he makes decisions about the company's day-to-day operations, but no partner is a general partner, meaning someone who is both personally liable for the business's debts and responsible for making day-to-day operating decisions.
LLPs, LPs and General Partnerships
Limited liability partnerships, limited partnerships and general partnerships are all similar in that they involve a company owned by multiple partners. LLPs and LPs, though, both offer at least some of the owners limited personal liability for business debts, whereas general partnerships leave all partners personally liable for any debts related to the company. General partnerships can be created by simply making an agreement to start a business together, and in many cases, they involve no contracts. If the partners do not file paperwork to create another sort of entity such as a corporation, LLP or limited liability company (LLC), then the company will remain a general partnership.
Whereas in a limited liability partnership all partners have limited personal liability for business debts, in a limited partnership at least one of the owners is considered a general partner who makes business decisions and is personally liable for the company's debts. LPs also have at least one partner who invests money but has limited control over daily business decisions and is not personally responsible for debts related to the company. This is often referred to as a "silent partner," although this partner is formally known as a "limited partner."
Essentially, general partnerships leave all partners responsible for the business's debts, and all partners in LLPs have limited personal responsibility for the company's debts. LPs are in between the other two, with at least one partner having personal responsibility and the ability to guide the company and at least one partner having limited responsibility for the company's debts but also limited ability to control the company's operations.
How Liability Works in Partnerships
In general and limited partnerships, there is always at least one general owner, meaning one person personally responsible for the company's debt if the business is sued. In a general partnership, each individual partner can be sued for the full amount of any business debt, and he can, in turn, sue the other partners for their share of the debt.
In limited partnerships, the general partners can be sued for the full amount of a business debt, but the limited partners cannot be forced to pay off business debts with personal assets. They can, however, lose their financial investment in the company and be forced to pay off debts with their share of the company's assets. A limited partner can become personally liable for debt if she does not stick to her passive role and starts taking an active role in the company. If a creditor can prove a limited partner started to act like a general partner, they can sue the partner in court for the full value of the debt. Some states define "active role" less stringently than others, so some (but not all) states allow a limited partner to vote on things that affect the partnership, including the removal of general partners, the termination of the partnership or the amending of the partnership, without losing her status as a limited partner.
In limited liability partnerships, things work a little differently depending on why the company is being sued. If one partner did something wrong and is sued for malpractice or gross negligence, that partner can be held personally liable and may be sued for personal assets outside of the company. The other partners cannot be sued for the full debt related to that partner's wrongdoing. That being said, if the partnership is sued and no partner acted wrongfully, then all partners have limited personal liability, so they cannot be forced to give up personal assets to pay a business debt, although they can lose their investment in the business.
Why Create a LLP?
These partnerships are often used with professionals such as dentists, doctors, accountants and lawyers, which is why so many of these types of companies have LLP at the end of their names. An LLP allows these partners to band together to pool their resources and clients, lowering the costs of doing business while increasing their capacity for growth. The LLP structure also makes it easy to add or remove partners as needed, which makes the partnership more practical for most professionals who may unite or disband regularly.
While these partners may like sharing their office expenses and clients with one another, they generally do not want to be personally responsible if their partner is sued for malpractice. The LLP protects the individuals involved from personal responsibility for overall business debts or their partner's malpractice.
In essence, limited liability partnerships offer the best of both general partnerships and limited partnerships in that every partner can still take an active role in the business while still being protected by limited personal liability for the company's debts.
How to Create a LLP
Limited liability partnerships must be filed with the state, and each state has its own rules defining who can create such an entity, what qualifies and how it must be created. In some states, LLPs are only available to select professionals such as doctors and lawyers. Some states prohibit professionals from forming a limited liability company, which offers the increased limited liability of a corporation, so these professionals are often cornered into forming LLPs. Some states require LLPs to carry professional negligence or malpractice insurance or to post a bond to be used for future liability concerns because the partners have personal liability for their debts. Most states require a company to include LLP in its name so customers and others know of the entity's status before they do business with them. It is important to check your state's regulations before attempting to form a LLP or other entity.
In most states, in order to start a LLP you must file paperwork, such as a certificate of limited liability partnership, and pay a fee. The paperwork is similar to that filed by corporations and includes information about the partners and the business. In order to maintain your LLP status, most states require you to file annual reports on the status of your business.