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Disadvantages of LLPs

written by: nataliajones•edited by: Jean Scheid•updated: 8/17/2010

There are a number of reasons that LLPs usually get the vote, but under some circumstances the disadvantages of limited liability partnerships tip the balance of the scales in the opposite direction.

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    Disadvantages of LLPs The limited liability partnership was created in the mid-nineties as an answer to some of the downsides of other forms of company structures, namely the partnership and the corporation. In effect, the limited liability company was supposed to take the best of these two structures and roll them neatly into one. However, there are downsides to every choice and the decision of which company structure to choose is no different. The following are a few of the main disadvantages of limited liability partnerships.

    No Consent Needed from Other Partners

    One of the major disadvantages of limited liability partnership structure is that one partner can conduct business or use partnership funds without the consent of the other partners. This legal flexibility might be useful in certain situations but it certainly requires an extreme amount of trust. The fact that business decisions can be made without the consent or even the knowledge of the other partners involved means that the partners that are included need to be carefully chosen to avoid any potential problems.

    May Be Necessary to Have One General Partner

    Limited liability is of course what makes this company structure so desirable, but in some states there must be at least one partner with unlimited liability for the partnership to be formed. This might make the agreement more difficult to forge because it places undue pressure on a single member. The partner that has unlimited liability of course can be rewarded for taking the risk but the mere fact that one person is liable to bear the brunt of the mistakes of the group can be very disheartening and just might cause some groups to lean toward the ordinary partnership so all the partners have to share the risk equally.

    Some Limitations May Apply

    While starting a limited liability partnership might sound alluring, this company structure is usually not open to all business types or professions. Generally speaking, most states allow lawyers, accountants, engineers or architects to form limited liability partnerships, but many other professions and business types are excluded.

    The Partnership Contract is the Law

    While under other forms of company structure, the ownership of assets and the income they generate may be decided by neutral bodies. The partnership contract states how assets are to be divided and this must be adhered to. One partner's contribution may amount to much more in money-terms than another partner's contribution, yet if the original agreement does not split the revenue to reflect this, the income flows will be divided according to what is stated in the agreement. This might seem unfair but the partnership contract acts as the rule of law and can be renegotiated but it cannot be changed without proper consultation and agreement.

    Reference:

    Disadvantages of a Partnership - Legal Zoom

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