When starting out on a business venture, no matter the size or industry involved, it’s critical to determine which type of structure that business is going to fall under. They all have their perks — and their pitfalls.
One of the key factors that business owners take into consideration when making this decision is the likelihood of future litigation — because when it comes to business defense, some structures offer less protection than others. Here’s why some partnerships are especially vulnerable to lawsuits.
Types of Partnerships
Not all partnerships are created equally. In Pennsylvania, there are four basic types of business partnerships:
- General Partnerships
- Limited Partnerships
- Limited Liability Partnerships (LLPs)
- Limited Liability Limited Partnerships (LLLPs)
As some of their names hint, each type of partnership has a different degree of protection when it comes to liability in lawsuits.
How Litigation Effects Different Kinds of Partnerships
Besides the emotions and matters of principle which may be in play, the hard-line objective of a lawsuit is money — and that money has to come from somewhere. Unfortunately, in the case of a general partnership, that “somewhere” is the partners themselves. The individual partners are equally and personally liable — meaning that, in the worst case scenario, the partners could lose their personal funds, vehicles, or even homes. Furthermore, one partner is liable for debts owed by the other partner.
A limited partnership is a mix-and-match situation: one member acts as a general partner, while the other is a “limited partner.” As the terms suggest, the general partner has higher personal liability than the limited partner. The limited partner cannot legally be forced to pay off lawsuit debts with their personal assets — but the general partner certainly can. (The trade-off is that the general partner has greater authority and control over company decisions.)
Limited liability partnerships (commonly referred to as LLPs) are a popular choice for business structures, because they combine the simplicity and flexibility of a partnership with the protected status of a corporation — to an extent.
In an LLP, all partners enjoy “limited liability,” meaning that typically, a partner will not be held personally liable for the company’s debts — a plaintiff may pursue company money or property, but personal money and property are generally off-limits. However, it should be noted that there are exceptions to this rule, referred to as “piercing the corporate veil.” A court may rule to pierce the corporate veil if the company has committed fraud, or if the company has failed to adhere to the standards under which a corporation normally operates. The number of people controlling the LLC, as well as the amount of capital invested in the LLC, can also influence a decision to pierce the corporate veil.
In the case of limited liability limited partnerships, partners are highly protected because LLLP members enjoy the shield against personal liability offered both by a limited partnership and a limited liability corporation. While LLLPs are not yet recognized by every state, they are formally acknowledged by the state of Pennsylvania.
If your business is in need of a highly skilled business defense attorney, contact Berkowitz Klein today. We have over 30 years of experience helping clients just like you.