A limited liability partnership or LLP is a legal type of business organisation and a form of partnership in the United States composed of general partners and limited partners. LLP allows limited partners to enjoy limited personal liability while general partners retain unlimited personal liability.
General partners in a limited liability partnership have full managerial function and control of the business. Standard rights and duties in a general partnership apply to these individuals. They also accept full personal responsibility for partnership liability.
On the other hand, limited partners do not have personal liability beyond their investment in partnership interest. They cannot participate in the overall management and daily operation of the LLP business. However, they are bound to specific legal rights and duties.
Legal rights of limited partners in a limited liability partnership
The legal rights of limited partners in an LLP business are theoretically similar with the rights of shareholders in a corporation. Take note of the following:
1. Right to vote: The General Partnership Act provides limited partners with the legal right to vote in an without incurring liability. They are allowed to vote for the dissolution of the limited liability partnership business or the disposal of its assets. They are also allowed to vote for amendments in the partnership agreement or for the admission or removal of a general or limited partner. Limited partners are also asked to vote for other fundamental changes in the scope of the LLP business.
2. Right to inspection of books and records: Limited partners have the right to inspect the books and records of the business. The rationale behind this legal right is that limited partners should be entitled to know how management is conducting the affairs of the business in which they are part owners.
3. Right to transact business with the partnership: Another legal right of limited partners is the capacity to transact business with the limited liability partnership. This transaction varies. An example of such is lending money to the LLP business whether as a secured or unsecured creditor.
4. Right to bring derivative action: Derivative action is a legal action or lawsuit brought by a partner on behalf of the business against a third party. This is an important legal right of limited partners. A particular limited partner can bring derivative action especially if the general partners improperly refuse to take necessary legal action against circumstances that are harming the LLP business.
5. Right to withdraw from the partnership: The partnership agreement should contain a provision that would allow limited partners to withdraw from the limited liability partnership business. However, in the absence of such provision, limited partners can provide a notice of withdrawal on six months notice.
6. Right to apply for dissolution of partnership: In instances when a limited partner reasonably deems the business no longer feasible or functional to carry on, he or she may apply for the dissolution of the limited liability partnership. This is another legal right of limited partners.
7. Right to assignment of interest: Just like in general partnership in which the general partners have the right to assign their interests in the partnership, limited partners can also assign their interest to profits. However, this assignment does not and will not result in the dissolution of the partnership.
Legal duties of limited partners in a limited liability partnership
The legal duties and obligations of limited partners in an LLP business are theoretically similar with the duties and obligations of shareholders in a corporation. Take note of the following:
1. Limited liability: Just like the shareholders in a corporation, limited partners do not have personal liability for partnership obligations, but rather, they only risk their capital contributions in the partnership business.
2. Loss of limited liability: Limited Partners can lose their limited liability status due to any of the following instances:
- By serving as a general partner: A limited partner may also, at the same, become a general partner in the same limited liability partnership business. In such case, the limited partner will lose his or her limited liability.
- Allowing name to be used in the partnership name: A limited partner foregoes his or her limited liability rights if he or she allows his or her name to be used in the business name, except when except where the business has been carried on in his name before the limited partnership was organised.
- Participating in the control of business: In as much as a limited partner do not have managerial authority and cannot participate in the day-to-day activities of the limited liability partnership, he or she cannot participate in the control of the said business. Otherwise, if he or she did so, he or she will lose his or her limited liability. Although a limited partner may be hired as an employee of the partnership, and even as he or she acts as a manager-employee, still it does not constitute control of the partnership business.
Rights and duties of general partners in a limited liability partnership
General partners in a limited liability partnership have the same legal rights and duties as general partners in a general partnership business. They also have the same rights as those of limited partners.
An important principle that differentiates a general partner from a limited partner is the fiduciary duties. This means that the general partner has a legal duty to act solely in the interest of the organisation and of his or her partners.
The scope of liability and responsibility is another principle that differentiates a general partner from a limited partner. General partners are personally liable for all the liabilities including debts of a partnership business. General partners also have the authority to act on behalf of the limited liability partnership business.