Disadvantages of limited liability partnerships

Written by christopher cross
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Disadvantages of limited liability partnerships
LLPs have several disadvantages. (handschlag image by Dron from Fotolia.com)

A Limited Liability Partnership, or LLP, removes the personal liability of its members from the mistakes that another member may make. So, if your LLP partner has a lawsuit filed against him, you will not have any liability in the case even though he is your business partner. In addition, each member has an equal say in what goes on during the running of the business. However, this type of business arrangement does come with disadvantages, too.

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Importance of Trust

How much you can trust your partners is important when forming an LLP. First, if one partner backs out of the partnership, it is dissolved. This means any brand or clients you have worked for may disappear overnight. Secondly, a partner can enter the entire partnership into binding business agreements without consulting the other partners. It is important that you can trust your other members not to do this. Third, any money or assets you contribute to the partnership, become owned by the partnership unless you and your partners agree otherwise. The only way to get your money or assets back from partners who want to keep them for the partnership is to have a written agreement specifically stating what you plan to take back.

A Newer Concept

LLPs have not been around as long as corporations and other business structures with which the general public is more familiar. This could make potential clients or other companies leery of entering into an agreement with the partnership. Add to that the term "limited liability" and it may send clients or potential business associates running.

Variances by State

Because LLPs are a relatively new concept, the regulations on LLPs can vary widely by state; some states do not even recognise this type of business structure. This may cause problems when it comes to enforcement of a legal agreement or in the event that your partnership is involved in a court case, especially if the case pits one partner against another.

Limited Access

This type of business structure is not accessible to many types of businesses. It is mainly used by professionals, such as lawyers and accountants, who may be barred from incorporating by the laws in their state. This way, these professionals can form a separate business entity that provides them some personal protection from liability cases.

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