LLC, LLP, Limited Partnership or What?
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LLC, LLP, Limited Partnership or What? Hey Trez_Talk
Guys,
We are forming an investment club,
and some of our members think we should be a limited partnership. You always
seem to advocate general partnerships. What gives?
Yes, this question keeps coming up. We have all heard the old
bromide that you should never do business as a general partnership because
this will make you liable for all the debts of your partners.
This is not exactly true. A general partner does have exposure
for all liabilities of the partnership, but partners do not have exposure for
liabilities of the other partners for non-investment club matters. If a club is
buying on margin and/or shorting stocks, the club could assume a liability for
which its members would be jointly and severally liable. It is for this reason
that most partnership agreements forbid buying on margin.
How about if a treasurer takes off with all the club's funds?
Well, this is not a happy state of affairs, but the members of a general
partnership are no worse off than if they were a corporation with the limited
liability which that entails. They would still lose the money with which
the untrustworthy treasurer absconded.
The usual example of liability for a general partnership is
the case where a guest speaker falls and is injured on the steps of the meeting
place. I have never heard of this happening, but the example is brought up time
and again. Yes, the members of the club could be personally liable for the
consequences of such an event. If the club is a member of NAIC, the annual dues
provides insurance which protects against this happening.
I can hear your comments now. Well, ok, it isn't very likely, but wouldn't it still
be better to be a limited partnership just in case this unlikely event happened.
Or what about these LLCs or LLPs that I have been hearing
about.
Let's take limited partnerships first. I believe that,
legally, a limited partnership is one with one general partner and all other
partners being limited. The limited partners have no voice in the management of
the partnership, and their liability is limited
to the amount of their investment. I
know of no investment clubs that are set up under this type of entity, although
there may be some. The problem is that the SEC could very well say that this
entity should be registered with them because one partner is making all
decisions for the inactive partners. See http://www.sec.gov/consumer/invclub.htm for
more information.
LLCs (limited liability corporations) and/or LLPs (limited
liability partnerships) are a different matter. These are a somewhat recent
development authorized by certain states. These entities are taxed as
partnerships, but enjoy the limited liability enjoyed by corporations. The
problem with them is that annual fees tend to be high.
Investment clubs have been using general partnerships for over
50 years. It is the entity of choice of the NAIC. Unless you can find a state
where the fees for a llc or llp are very low, my recommendation is to utilize a
general partnership for investment clubs.
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