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Editorial 8 MIN READ

The LLP and the LLLP, reappraised in the BOI era

Two partnership variants that were supposed to fade, and the narrow cases where they are still the right answer

The Editors
Staff, Incorporator.org
8 min read Updated
Contents 7 sections
  1. What an LLP actually is
  2. What an LLLP actually is
  3. How the Corporate Transparency Act lands on both forms
  4. Federal tax is the part that does not change
  5. When either form is still the right answer
  6. A maintenance note worth getting right
  7. Sources

he LLP and the LLLP are the two partnership variants most founders never consider, and for most founders that instinct is correct. They exist because a narrow set of practices, mainly law firms, accounting firms, and certain investment funds, need the partnership tax spine with a specific shape of liability shield bolted on.

This piece is a 2023 reappraisal of both forms. The Corporate Transparency Act is live for new formations starting January 1, 2024, and both an LLP and an LLLP are created by a filing with a state office, which means both are "reporting companies" by default under 31 USC § 5336. That changes the maintenance calculus enough to ask whether these forms still earn their place on the menu.

What an LLP actually is

An LLP is a general partnership that has registered with the state to add a statutory liability shield for the partners. The federal-tax treatment is unchanged: Subchapter K partnership, with §704(b) capital accounts and §704(c) allocations on contributed property, and no entity-level tax. What the LLP statute adds is a rule about vicarious liability.

The cleanest version of that rule lives in the Revised Uniform Partnership Act. RUPA § 306(c) provides that an obligation of a partnership incurred while the partnership is an LLP is solely the obligation of the partnership, and a partner is not personally liable for it merely because of the partnership relationship. In practice, that means the innocent partner in a multi-partner firm is not personally on the hook for another partner's malpractice, negligence, or wrongful act. The partner who committed the act is still personally liable; the firm's assets are still on the table; the shield operates only between the firm's creditors and the other partners' personal balance sheets.

Delaware's version is at 6 Del. C. § 15-1001, which sets out the statement of qualification that converts a general partnership into an LLP under Delaware's RUPA. The filing is short, the fee is modest, and the effect is to give the partners the § 306(c) shield going forward. New York, California, and Texas all have analogue statutes, though the details diverge.

Texas is the obvious trap. The Texas Government Code requires law firms practicing as LLPs to register as "professional limited liability partnerships," the PLLP form, and carries its own insurance and naming requirements (Tex. Gov't Code § 81.101 and the related Bar rules). A Texas law firm that files a generic LLP statement without the professional overlay has not completed the registration its regulator expects.

The forms that use LLPs in volume are predictable. Large law firms pick LLP because most states will not let a law firm organize as a PLLC or an LLC at all; the state bar rules funnel them into either a professional corporation or an LLP, and the LLP preserves partnership tax without the double-tax and accumulated-earnings friction of a PC. Big Four and regional CPA firms use LLP for the same structural reason, plus the § 306(c) shield against another audit partner's malpractice claim. Outside those two professions, the LLP is a rounding error.

What an LLLP actually is

An LLLP is a limited partnership that has taken the additional step of registering for LLP status. The underlying entity is still a Delaware (or Texas, or Florida) limited partnership: one or more general partners, one or more limited partners, a certificate of limited partnership on file with the state, and an LP agreement governing the economics. What the LLLP election does is extend the LLP-style shield to the general partner so that the GP is not personally liable for the entity's debts purely by virtue of being the GP.

In Delaware, the statutory hook is 6 Del. C. § 17-214, which allows a Delaware LP to elect to be a limited liability limited partnership by including that election in its certificate of limited partnership or by amendment. The election is simple to make and, once made, replaces the common-law rule that a general partner of an LP is jointly and severally liable for the partnership's obligations.

The main reason a fund sponsor would bother is that the general partner of an LP is usually itself an entity (an LLC or a corporation), and the sponsor can already firewall personal liability by ensuring the GP entity has thin assets and that individual principals sit behind that entity. The LLLP election adds a belt to that suspenders, at the cost of one more form and one more maintenance item.

The important limit: not every state recognizes the LLLP form for an entity doing business there. California is the significant holdout. An out-of-state LLLP doing business in California is treated as a limited partnership for state-tax and registration purposes under California R&TC § 17936, and the Franchise Tax Board's Legal Ruling 2014-01 is explicit that California does not afford LLLP status to foreign entities for liability purposes either. New York similarly does not authorize domestic LLLPs and is skeptical of the foreign-LLLP liability claim. A Delaware LLLP investing in California real estate should not assume its LLLP shield follows it across the state line.

How the Corporate Transparency Act lands on both forms

The CTA's reporting-company definition at 31 USC § 5336(a)(11)(A) covers any entity created by the filing of a document with a secretary of state or similar office. An LLP is created by filing a statement of qualification; an LLLP is created by filing a certificate of limited partnership plus the LLLP election. Both are in scope.

Starting January 1, 2024, new reporting companies file a beneficial ownership information report with FinCEN within 30 days of formation; existing entities formed before that date have through the end of 2024 to file their initial report. The data required is the beneficial owners' legal name, date of birth, residential address, and a unique identifying number from a government-issued ID, together with an image of the document.

The carveouts at 31 USC § 5336(a)(11)(B) matter for both partnership forms. Subsection (xiii) exempts accounting firms registered in accordance with section 102 of the Sarbanes-Oxley Act, which picks up the large PCAOB-registered firms. Subsection (xix) exempts governmental authorities. The large-operating-company exemption under (xxi) requires more than 20 full-time US employees, more than $5 million in gross receipts or sales on the prior-year federal return, and a physical office in the United States; that is the exemption most mid-sized LLPs will look at first.

The practical read for a three-partner law firm or an eight-partner CPA firm: no exemption, file the BOI report, and keep it current when a partner joins or leaves. The practical read for a 40-lawyer AmLaw firm or a PCAOB-registered accounting practice: the firm itself may qualify, but any subsidiary entities need their own analysis.

Federal tax is the part that does not change

An LLP is, for federal tax purposes, a partnership. An LLLP is, for federal tax purposes, a partnership. Subchapter K applies. The partners receive a Schedule K-1 and pick up their distributive share of income, loss, gain, deduction, and credit. Special allocations are permitted so long as they have substantial economic effect under the §704(b) capital-account regulations, and contributed property is subject to the §704(c) pre-contribution-gain rules. Self-employment income flows through to the general partners and, under the current state of authority, to most active LLP partners as well.

The check-the-box election is technically available, but electing corporate treatment for an LLP or LLLP defeats the purpose of choosing those forms; anyone who wants corporate tax picks a different entity upstream.

When either form is still the right answer

For the LLP, the answer narrows to two situations. First, a professional-services firm in a state that does not permit PLLCs or that funnels the profession into LLP or PC. Law firms and CPA firms are the dominant examples. Second, a legacy general partnership that has operated for years and wants the RUPA § 306(c) shield without unwinding its existing economics. The LLP conversion preserves the existing capital accounts, the existing tax elections, and the existing contracts; re-forming as an LLC would not.

For the LLLP, the answer is even narrower. Cross-border real-estate and investment funds that have historical reasons to sit in limited-partnership form, often because foreign LPs are comfortable with LP and skeptical of LLC tax classification, use LLLPs to give the GP entity a statutory shield that in practice rarely matters but is cheap to obtain. Ranching, farming, and family-partnership structures in states with favorable LP case law pick LLLP for the same reason. Outside those narrow use cases, an LLC manager-managed structure delivers the same economic result with less state-to-state variation and without the California recognition problem.

For a good sense of how these forms sit next to the LLC in 2016 and what changed after, the Delaware LLC formation guide remains the right reference on the alternative most founders pick instead.

A maintenance note worth getting right

Both forms require something most LLC founders are not used to: an affirmative, periodic re-registration. Delaware LLPs file an annual report by June 1 and pay the annual fee; miss it and the LLP status lapses, which is worse than a typical LLC franchise-tax miss because the partners are exposed to the common-law general-partner liability the shield was added to avoid. Texas PLLP renewals are on a similar cadence and carry the same failure mode. A calendar entry and a registered agent willing to forward the notice are not optional for either form.

That single compliance exposure is why a lot of firms that started as LLPs in the early 2000s have migrated to PLLCs where their state permits, and why the LLP's remaining users are the firms whose regulators do not permit the alternative. The LLLP has a smaller installed base and a smaller tailwind, and it is worth asking, on every new fund structure, whether the LLP-style shield on the GP is worth the additional state-by-state recognition risk. For most deals the answer is no and an LLC-manager structure is cleaner. For the handful where the answer is yes, § 17-214 is still there.

Sources

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